With the San Francisco 49ers girding for Sunday's Super Bowl, there's been much talk of the legacy set by the championship teams of the 1980s and '90s.F
Some of the key players from those teams, though, have left another legacy: a troubled venture capital firm that invested the fortunes of other famous athletes, then floundered near bankruptcy. Now, in a lawsuit about to get under way in Santa Clara County Superior Court, three former employees of HRJ Capital -- formed by former 49ers Harris Barton, Ronnie Lott and Joe Montana -- claim they were cheated out of tens of millions of dollars when Silicon Valley Bank seized the now-defunct firm's assets four years ago.
Beyond the celebrity names involved -- luminaries including John Elway, Jerry Rice and Barry Bonds invested in the firm -- the case is being closely watched for its potential impact on the venture capital industry. That's because Judge James Kleinberg issued a preliminary ruling in November that could force HRJ's investors, known in venture parlance as limited partners, to pay damages to the three former employees.
"The limited partners' interests are usually sacred territory," said one such investor in the funds, who asked not to be identified because the litigation is ongoing.
In a VC fund, venture capitalists -- known collectively as the general partner -- put money from limited partners into private companies, then share the proceeds when those companies are
Capital Dynamics, a Swiss private equity firm, bought the funds HRJ raised and managed from Silicon Valley Bank in 2009; it now manages those assets as the general partner. And it has argued in court filings that it and its limited partners shouldn't be liable for whatever promises HRJ made to the three employees.
But Kleinberg wrote that the trio ¿had "a reasonable belief" that those promises were made on behalf of the funds in which the limited partners invested, and that those funds -- which each are named as defendants in the suit along with Capital Dynamics -- could be on the hook.
Several experts called the judge's ruling unusual and said it could have a chilling effect on a venture industry that has already seen many limited partners pull back amid subpar returns.
More than 900 limited partners, ranging from athletes like Elway and Rice to insurance companies and university endowments, put money into HRJ's funds over the years. And three of them told this newspaper they believe Capital Dynamics, not the limited partners, should shoulder the responsibility if the judge upholds the plaintiff's claims -- which could exceed $22 million.
"Everybody's waiting with bated breath for Capital Dynamics to do the right thing and pay it out of their management fees," one limited partner said, while insisting on anonymity to preserve his business relationships.
A senior official at Capital Dynamics declined to comment, citing the ongoing litigation. But he pointed out that if the funds ultimately have to pay the plaintiffs the more than $22 million they are seeking, those payments would be shared by the 900-plus limited partners. He also said those investors would have lost far more money had Capital Dynamics not agreed to settle HRJ's debt with the bank.
Jonathan Axelrad, an attorney with Goodwin Procter in Menlo Park who specializes in venture capital funds, said each partnership contract typically contains detailed language about which expenses are borne by the general partner and which by the limited partners' funds.
While he noted that he hasn't seen the fund agreements between HRJ and the plaintiffs, Axelrad said it's not customary "to expect that a fund would be legally responsible for payment of salary to employees of the venture firm."
A half-dozen venture capitalists said they'd never heard of a general partner tapping investors' money to pay such a legal liability.
Adam Marcus, of OpenView Venture Partners in Boston, said if a high-profile firm drained its limited partners' investments to cover huge legal expenses, "LPs might become more cautious about investing" in other firms.
HRJ long was a Silicon Valley success story. Lott and Barton founded it as Champion Ventures during the dot-com heyday, and when Montana joined in 2003, the firm was renamed to reflect the partners' initials. At its height in 2008, the Woodside-based partnership managed $2.4 billion and boasted offices in Atlanta, Chicago, New York, Shanghai and Zurich.
Thanks to its brand-name clients, the firm was allowed to put money into Sand Hill Road's top venture firms, as well as hedge funds and real estate trusts. But HRJ ultimately was hamstrung by its unusual strategy of promising money to those various funds before securing the cash from its own investors.
The firm did so to prove to potential backers that it had the connections to get into the best deals. To cover its promises, HRJ borrowed from Silicon Valley Bank, which it then repaid with money from new investors.
But the global credit crunch left the firm unable to raise enough to meet its obligations. And the bank, to which HRJ owed $69 million, seized the investment funds in December 2008.
The three plaintiffs -- Lane Auten, Duran Curis and Darren Wong, who managed HRJ's investments and recruited clients -- claim they're owed tens of millions of dollars in management fees that HRJ rerouted to the bank in a desperate effort to save the firm.
Michael Baumann, the attorney for the three plaintiffs, said via email: "The funds agreed to pay management fees, and my clients were promised a portion of the management fees for the services they provided. Instead of paying, the remaining defendants" -- in other words, Capital Dynamics -- "pocketed the fees owed to my clients."
A spokeswoman for Silicon Valley Bank, which in the fall settled with the plaintiffs for $2 million, declined to comment.
Montana left HRJ three years before its 2008 collapse and wasn't named as a defendant in the suit, though he and the other founders could still be called to testify. Lott and Barton, who also declined to comment, settled with the plaintiffs last summer for $100,000.
The real money resides in the more than two dozen HRJ funds that Capital Dynamics now controls.
The Swiss firm has insisted in court papers that it acquired HRJ's assets, not its legal liabilities, and that the suit should be dismissed; Judge Kleinberg shot that down in his November ruling. Final pretrial motions are due Monday, with opening arguments scheduled for Feb. 19.
As the case has dragged on, HRJ's implosion also garnered a review by the Securities and Exchange Commission. Emmett Stanton, a lawyer for Barton and Lott, told this newspaper that the investigation has been concluded, with SEC staff members recommending no further action.
Interestingly, neither the limited partners interviewed for this story, nor the plaintiffs' lawyer, considered Barton and Lott primarily at fault for HRJ's meltdown. They noted that the ex-NFL stars tried to look out for the firm and investors, even to the point of making personal guarantees on the loans from Silicon Valley Bank.
Lott -- a Hall of Famer and noted philanthropist -- remains partners with Barton in a nonprofit, Champion Charities, that's raising money for a new brain cancer research center at UC San Francisco. A fundraiser last summer featured a number of gridiron greats, including Montana and Steve Young, who succeeded Montana as 49ers quarterback and also was an investor in Champion Ventures.
Barton, after a year with Capital Dynamics, founded Menlo Park-based H. Barton Asset Management, a $120 million fund that invests in venture-backed startups. In 2011, he told Bloomberg News he accepted responsibility for the "rookie mistakes" that led to HRJ's collapse.
"My name was on the door," he said then, "so I'll take the hit."
Contact Peter Delevett at 408-271-3638. Follow him at Twitter.com/mercwiretap.
Here are some of the celebrity athletes and coaches who invested money in Champion Ventures/HRJ Capital:
Andre Agassi, tennis
Troy Aikman, football
Barry Bonds, baseball
Oscar De La Hoya, boxing
Tim Duncan, basketball
John Elway, football
Wayne Gretzky, hockey
Peyton Manning, football
Dan Marino, football
Rick Pitino, basketball
Jerry Rice, football
Source: Staff reporting
the hrj saga: a score card
The founders: Former 49ers Harris Barton and Ronnie Lott launched the investment firm in 1999; Joe Montana joined in 2003.
The limited partners: Pro athletes, college endowments and others put billions into HRJ's funds.
The new general partner: Capital Dynamics began managing the funds after HRJ's 2008 collapse.
The plaintiffs: Three ex-HRJ employees say Capital Dynamics and the funds in which the limited partners invested owe them tens of millions.