Venture Investors Battling to Get Cash From Sinking Fund.

Three months ago, San Vicente Group appeared to be just another broken-down venture fund, hobbling along in the wake of the discredited Internet investment craze.

Then something extraordinary happened. After San Vicente's management sought to register its securities, a group of dissenting shareholders revolted and ousted its board. The new regime, led by the former journalist who engineered the coup, is suing ex-management to recover some of the money they claim was squandered. This week, shareholders will vote on a plan to dissolve the fund and return most of the remaining $22.5 million in cash to shareholders.

"It was clear San Vicente was in trouble," said Peter Fuhrman, a former Forbes editor in Europe who organized the far-flung dissidents via phone. "Had one of the shareholders I spoke with chosen not to back the initiative ... the changes never would have taken place, and I believe shareholders would have ended up losing everything."

To be sure, there are lots of investors who committed money over the last few years to now-dormant funds and who would like their money back. But the structure of most venture funds prevents that from happening. In the case of San Vicente, disgruntled investors have an opening because of the way the fund is set up -- as a corporation, not a limited partnership, in anticipation of a CMGI-like public float -- and because of the alleged misdeeds.

San Vicente's current board seeks the return of at least $20 million from former management, and the dissolution of a separate partnership that still controls the sale of San Vicente's investments. A lawsuit accuses former management of "a pattern of breaches of fiduciary duty, self-dealing, ignoring conflicts of interest, converting corporate opportunities for their personal and alternative corporate interests, committing corporate waste and entrenching themselves in their positions as officers and directors."

Among the most serious allegations by the new board is that San Vicente improperly "bought back" $8.2 million of its shares from two companies with ties to San Vicente's old regime: GlobalNetFinancial.com Inc., and a sister company, New Media Spark Plc. (New Media Spark, based in the U.K., is now GlobalNetFinancial's parent.) The lawsuit claims that GlobalNetFinancial, whose leadership founded San Vicente, and New Media Spark didn't pay for the shares they sold.

The old regime also established a separate partnership to hold San Vicente's investments. The partnership is controlled by a number of former officers and directors, and still has veto power over the sale of San Vicente's assets.

Dissidents also decry the granting of "golden parachutes" to former management, including co-CEOs Christopher "Kit" Jennings and Jay Matulich. They took more than $1.9 million when they left, despite orders to the contrary from the new board.

Lawsuit's claims denied

The fund's former management denies all claims in the lawsuit, said Michael Diamond, a lawyer with Milbank Tweed Hadley & McCloy LLP, who represents most of the defendants. "The environment for high tech has become much more difficult since this was started," he said. Management "was continuing to try to find good investment opportunities which would increase shareholder values."

Diamond defended the buybacks, noting that the per-share price was lower than the amount of cash per-share San Vicente then held. He also said he saw no conflict of interest in the purchases from related companies. "I don't think that any of (San Vicente former management) were still on the board of GlobalNet when that transaction was done," he said.

He maintains that GlobalNet did pay $3.2 million for some of its shares, and the ones given to New Media Spark were disclosed in the private offering memorandum. (San Vicente filings indicate that GlobalNet paid $3.2 million for 640,000 of the shares it held, and New Media Spark paid $350,000 for 70,000 of its shares.)

"The only two shareholders who were able to sell their shares back to the company are precisely the two shareholders who paid little or nothing for those shares," countered Fuhrman. Those two companies -- both with links to San Vicente management -- profited, he said, "while all other investors have incurred real and significant losses."

Diamond said importance of the investment partnership was being "overplayed" by Fuhrman, and that the golden parachutes were probably "less than the norm." He also said orders by the new board to freeze activities weren't valid.

Fuhrman disagrees. "It is simply outrageous that the former management should have rewarded themselves with these unduly lavish parachutes," he said.

Charges 'spurious'

The original group was led by Stanley Hollander, a former electronics distributor who turned to investment banking in the mid-1980s. Originally San Vicente's chairman and later one of the ousted board members, Hollander hit the jackpot by forming Nasdaq-listed GlobalNetFinancial.com, operator of a number of investment-oriented Web sites in Europe. (Hollander's lawyer, Paul Richler of Morgan Lewis & Bockius LLP, calls the dissident board's allegations "really spurious, and misleading.")

At its height, GlobalNetFinancial's stock was worth $57 a share, and its investment portfolio was valued at over $1 billion. It was then, in March 2000, that Hollander and other insiders at GlobalNet Financial began raising money for San Vicente Group, to invest in European tech ventures. Much of the money came from institutional investors who already were riding high on earlier bets on GlobalNetFinancial. Overlapping share ownership between San Vicente and at GlobalNet -- where shareholders also ended up battling the management team -- may have been San Vicente management's undoing.

'Bad investment decisions'

Soon after San Vicente Group was formed, the tech bubble burst. The new board claims only three of the 16 companies invested were in Europe, and that investments totaling $14 million are now worth less than $2 million.

"The severe decline in the value of the portfolio is not the result of the typical cycle of early-stage investing," the board said in a proxy prepared for the Jan. 16 vote. "They were simply bad investment decisions."

After sustaining heavy losses, GlobalNet ceased operating last August. When New Media Spark -- which already had financial ties to GlobalNet -- offered to buy the assets, many of GlobalNet's investors thought the offer was too low. One of them turned out to be Fuhrman, who helped organize a competing bid, driving up the eventual sale price to New Media Spark. Fuhrman, who was not a shareholder in San Vicente Group, said it was there that many San Vicente holders first met.