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The desire of some for open access to the performance records of public pension and university holdings in risky venture capital fund investments has run headlong into venture capitalists guarding what they consider trade secrets. Ohio’s $21 billion Bureau of Workers’ Compensation Fund is the latest to face the clash between calls for transparency in public investments and venture capitalists’ need to keep the highly competitive incubation of new companies confidential. Ohio’s state Freedom of Information Act (FOIA) may be put to the test within days. Jeremy Jackson, a bureau spokesman, said the agency will go to state court as early as this week to seek a ruling on how much information it may release about its $409 million investment in 68 private equity funds without violating Ohio trade secrets law. The controversy is not just local. At least a dozen states have grappled with the public demand for investment transparency in an era of corporate scandals. “We are going to see more of [these challenges] in the next couple years,” said Carl E. Metzger, an attorney with Boston’s Goodwin Procter who represents the National Venture Capital Association (NVCA). He predicted that the number of states involved would double. Mark Heesen, the president of the NVCA said, “The line in the sand is when you start [disclosing] information about actual investing in individual companies.” State disclosure of information “about these very small emerging technologies can destroy them,” he said. Competitors can imitate the technology and other venture funds can discover how startups are valued or how well funded they are, he said. Private equity funds depend on long-term commitment of money from sophisticated investors such as state and municipal pensions, universities, banks and insurance companies. The funds may back risky, young businesses with the expectation of large rewards when the companies go public or are sold. Traditionally, the venture industry faces little public scrutiny of its investment processes-unlike highly regulated, publicly traded stocks-or the methods used by individual venture capitalists to value a prospective startup. The tension arises because public entities like state pension funds must comply with public-records disclosure laws, and they have increasingly received FOIA requests in the wake of Enron- and WorldCom-type scandals, giving venture capitalists jitters. The very threat that Ohio or other states might disclose confidential valuations of individual companies within a portfolio has been enough for some of the funds to shut the states out of future fund investments. Sequoia Capital severed its 22-year investment tie with the University of California in 2003 after a judge ruled that the university had to disclose investment performance details under the state’s FOIA law. The case was appealed all the way to the California Supreme Court, but by then Sequoia was gone. Sequoia also forced the University of Michigan out of its investment fund when the issue cropped up there. Both states imposed limits on their FOIA laws to prevent disclosure of some confidential investment information. Charles Schwartz, a retired physics professor at the University of California who successfully sued the university to open its books on private equity funds, said the new California law that took effect this month is too restrictive. “They went too far in putting on the secrets list all due diligence work, litigation, regulatory problems, conflicts of interest and past performance of any manager,” he said. Schwartz may not be done with California. He said that the university has not responded to his latest call for disclosure of the performance of individual fund managers, rather than simply describing their aggregate performance. He said he is talking to his lawyers again but it is too early to say whether he will head back to court. Ohio’s ‘coingate’ Ohio’s Bureau of Workers’ Compensation fund, which provides insurance for two-thirds of Ohio’s work force, became embroiled in a scandal when press accounts exposed that it had invested $50 million in a rare-coin fund through coin dealer and Republican fundraiser Thomas W. Noe, who managed the unorthodox investment. Later, $10 million to $12 million in rare coins could not be accounted for. In addition, there were $212 million in losses in a hedge fund investing in Treasury notes. The ensuing scandal, known as “coingate,” prompted the bureau to commission an investigation and report by Ennis Knupp & Associates. The bureau released a portion of the report publicly on Jan. 6 in response to FOIA requests, over the objections of venture capitalists. The report showed that the 68 private equity funds gained 4.5%, or $18 million, since the investments were first made in 1998. To be sure, the venture funds represent a small fraction of the bureau’s assets, less than 3%. But the total dollars for the venture funds are significant. Ohio committed $409 million initially and has promised to invest another $404 million over the next 10 years. In California, the huge state Public Employees Retirement System fund, or CalPERS, had private equity and real estate holdings of $8.7 billion out of its $450 billion fund. Now the Ohio bureau plans to seek court guidance as early as this week over whether state trade secrets law prevents it from releasing the most sensitive portions of each fund-including details of individual company valuations, performance and due diligence reviews. “No other state in the country has determined that this should be disclosed,” said Metzger. And he added that there is little, if any, precedent in Ohio on the issue of trade secrets in this context. He pointed to a single case, State ex rel. Besser v. Ohio State University, 89 Ohio St. 3d 396 (1995), which defined trade secrets in the university’s purchase of a hospital. The court required some disclosure, but not all that was sought. The FOIA laws were adopted by most states during the post-Watergate era 30 years ago and are out of date in addressing these issues in detail, Metzger said. “There are obviously competing interests here, and at what point do you cross the line?” he asked. If a competitor understands how you value a company or has access to a specific valuation, it could harm a fledgling company, he said. Since 2004, 10 states have joined California and Michigan in either passing or considering the protection of private equity funds from public disclosure laws, including Colorado, Florida, Illinois, Maryland, Massachusetts, Minnesota, Pennsyl- vania, Texas, Utah and Virginia, according to Andrea Schwartzman, a partner at Mayer, Brown, Rowe & Maw.

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