Venture Fund Sues PwC for Alleged Audit Deficiencies 

Burrill Life Sciences Capital Fund sued Burrill & Co.’s founder in July

A venture fund launched by Burrill & Co. is suing PricewaterhouseCoopers LLP for allegedly failing to flag unauthorized transfers that it claims led to millions in investor dollars getting siphoned off.

The fund, Burrill Life Sciences Capital Fund III LP, contends that PwC, its auditor, repeatedly approved its financial statements as sound from 2007 to 2013, when the firm should have scrutinized and alerted investors to transactions that weren’t allowed.

The fund’s decision in late October to take on PwC in Superior Court of California in San Francisco broadens the targets of a legal battle it has waged since summer.

“PwC adhered fully to its professional obligations in conducting its audits,” a spokeswoman for the Big Four accounting firm said. “The firm will defend its work vigorously, and we are confident we will prevail at trial should the matter reach that stage.”

It is rare for private equity and venture funds to sue their auditors, industry observers say. However, as a crop of funds launched in the boom era of the prior decade fail to meet expectations, auditors of these funds are likely to face heightened investor scrutiny—and a greater risk of getting sued.

“Auditors often face more liability or are sued more often when their clients are struggling financially,” said Mark Zimbelman, a professor of accounting at Brigham Young University who specializes in fraud detection. “Auditors have to make a lot of complicated judgment calls. And, they are only human.” He was speaking in general terms, not specifically about the Burrill case.

In a rare move, the investors in Burrill Life Sciences Capital Fund III LP—a fund that Burrill & Co. itself launched—dismantled the fund management team created by the firm.

The investors were among a very small group to have successfully replaced their fund manager. Fund contracts typically require votes from a majority—and in some cases, a supermajority—of investors before a manager can be removed.

In July, the fund, now managed by a slate of executives from health-care firm Kearny Venture Partners, sued the firm’s founder, G. Steven Burrill, and individuals and corporate entities tied to him for alleged fraud and breach of fiduciary duty.

The fund contends that more than $17 million was embezzled by Mr. Burrill and others from 2007 to 2013 and alleges those transfers drained capital that could have been deployed into deals, damping investors’ returns.

Mr. Burrill and the individuals and corporate entities accused of the improper transfers “generally deny the fund’s allegations,” according to a case management document filed with the court Sept. 18. Neither Mr. Burrill nor an attorney representing him and the Burrill corporate entities responded to queries sent Friday morning.

Now, the latest version of the same lawsuit, filed Oct. 21, includes PwC as the target of allegations.

The lawsuit claims PwC intentionally turned a blind eye to alleged fraud to avoid jeopardizing its relationship with the venture firm, a storied Silicon Valley player in its heyday.

The fund alleges unauthorized transactions from its coffers date back to 2007. Many of these transfers were labeled as management fees for work not yet done—even though the fund’s contracts didn’t allow for advanced payment of those fees, according to the fund’s lawsuit. The fund alleges that PwC failed to check if these transactions were permissible.

The lawsuit contends that a portion of the fund’s money was used to market other investment products raised by the firm and in ways that didn’t serve the fund’s investors.

Burrill & Co. originally raised $283 million for this fund and began investing it in 2006, backing companies such as pharmaceutical business Neos Therapeutics Inc. and renewable-chemicals company Gevo Inc.

In late 2013, insiders at the firm discovered the fund didn’t have enough money to make deals it had committed to and alerted investors to this shortfall, according to the lawsuit. PwC resigned around that time, the lawsuit claims.

Source: WSJ – Venture Fund Sues PwC for Alleged Audit Deficiencies

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