Meet the Whistleblower Behind a Silicon Valley Meltdown

capital firm called Rothenberg Ventures. The company's founder, Mike Rothenberg, was a young, charismatic Stanford University grad, and he was known around Silicon Valley for throwing these extravagant parties. Francisco had heard about his new employer's reputation, partly from a skeptical story I wrote for Business Week back in At

the time, Francisco didn't think much of it. It made me think it was a little bit risky, but um, I still thought the company was making good investments based on their portfolio, so I said, rush those concerns aside and in retrospect. Uh, I shouldn't have done that. I shouldn't have done that. Francisco says this because soon after he joined, he started noticing some unusual things, things that were raising his suspicions. The more he dug around, the

more he found. In just a few months in he discovered something he thought was bad, maybe even against the law, something that bothered him enough to take the very serious step of secretly reporting it to government regulators. Yeah. I mean, the internal debate was what will people think of me for doing this? I felt, I'm pretty sure it was the right thing to do, but you know, I thought about what are the consequences to me personally if I

love the whistle? A week after Francisco filled out an online form on the website of the SEC short for the Securities and Exchange Commission, a lawyer from the Commission got in touch with him. From there, Prince Cisco became something of a double agent, providing the government information about his employer. Francisco's actions set in motion a series of events that ultimately brought down one of the venture capital

industries aspiring stars. In addition to being investigated by the sec Rothenburg and his firm today is facing lawsuits from investors, creditors, and former employees. Hi I'm Akio and I'm Adam Satriano. And this week on Decrypted the whistleblower who secretly took on. An ambitious venture capitalist is coming out, revealing his identity and publicly speaking out about his experiences for the very

first time. Francisco said he decided to speak to us in part to encourage others to take action if they're seeing bad behavior at their companies. And Silicon Valley, where corporate governance sometimes takes a back seat to growing fast and making a name for yourself, employees are serving as one of the industry's toughest checks. So, Adam, you wrote a story about Mike Rothenberg and his VC firm. Back in the headline was telling Lee Silicon Valley's party animal. Yes,

he did not like that. Yeah, I bet give us some background about the guy. What got me interested was you had this young venture capitalist. He had raised a decent amount of money, and I had also heard the story that he had first introduced Mark Zuckerberg to Instagram's founder, Kevin's instroum. This was back when they were in their college days. But more than anything, I had heard about these events that he was throwing around San Francisco. Yeah,

can you give us an example. Well, my favorite was these events that he had had that he called puppy parties and they would rent out puppy is that people could pet. But there was this other one they did Quity called founders Field Day, and this was at a T and T park where the San Francisco Giants baseball team plays, and he branded the whole thing out, outfitted it with virtual reality boosts and other thing for entrepreneurs

to come and play with. Yeah, this is the thing that the HBO show Silicon Valley ended up parodying, right. It was this perfect example of all the absurdity and exuberance of the startup lifestyle. Richard, after your perfect game at tech Crunch Disrupt a few weeks ago, we fell in love with you and your tech. Look. We know everyone in the valley is after you, and we know that you're probably going to go with Peter Gregory, but we'd love to have you come play on our team.

Let's Sternteller capital funding on your Series A financing, because together, Richard, we'd be home run. And Rothenberg really seemed like a character from the show. When I interviewed him for that story in I sometimes wondered if he was putting me on. He has a real gift for hyperbole, even by the lofty standards of Silicon Valley. Here's a clip from a talkie gave its Stanford a few years ago, and we

want to talk a little bit about blue oceans. So when you're in a blue ocean, it means that it's kind of a new market. It hasn't fully developed, and people are I'm not yet sure where it's going to go, but everybody wins because it's a blue ocean and everybody's got the opportunities. And now back to red oceans. Rewind what did you just say. In a blue ocean, everybody can win. And the story we did wasn't a flattering profile.

That some former employees told me that Rothenberg made them buy up all the week's issues a business week at the airport so they wouldn't see him. But the firm was doing just fine even after your story. Right. Yeah, they aren't a big firm by any stretch, but they were backing a lot of companies like the stock trading app robin Hood, which is now valued at more than a billion dollars. And it was with that backdrop that Francisco joined Rothenberg Ventures to run their website and office

I T system. We recently visited Francisco at his one bedroom apartment in one of San Francisco's residential neighborhoods. It's in an old building built after the nineteen o six earthquake. It's at the top of one of the city's many large hills. Thanks. Thanks, I thought you like. He gave us a quick tour. It's essentially a nerdy bachelor pad. There was a big wayboard on one side of the living room, which I've seen in the bedrooms of some of my other friends who are engineers too. It's so

that they can write out their code by hands. Francisco so had these three big computer monitors on his desk, plus a few consoles to play his video games. And he had these framed pictures of Apple's famous ad campaign dubbed Think Different, featuring people like Picasso. His bedroom and his kitchen were a little bit messy. Can I see

what's in your fridge? Oh, you're soilent drinker For our listeners, Soilent is a drink made out of these different nutritional powders, and it's really popular with coders who don't want to spend time eating real food. Anyway. That's all to say that Francisco is a lot like other young engineers in Silicon Valley. He went to Stanford and the first job he took straight out of school ended up getting bought by the tech giant Cisco, not to be confused with

the nickname that Francisco goes by. And then with that small amount of money he ended up making from that acquisition, he started his own company that was an exchange for betting on the price of bitcoin. This kind of options market for bitcoin turned out not to be compliant with federal regulations, so the government sent the letter to shut it down, and he did not long after. In February,

Rothenberg Ventures hired Francisco. Rothenberg offered him a salary of a hundred and thirty thousand dollars plus a thirty thousand dollar bonus, and although he said the firm had scaled back on some of those glitzier events, it still had a luxury suite at the Basketball Arena where the Golden State Warriors played. He went to the games and even saw a Rihanna concert there once, all in the company's dime.

It was a sweet job for a young guy like Francisco, but it didn't take him long to start to notice some things. Well, the first red flag is actually my first week on the director of finance, who was also the head of clients quit. She just ran out. I didn't know why. Nobody explained it to me, but that was the first red flag. Was it clear that something was weird was going on? It was clear that something weird was going on, but I didn't know what it was.

I thought it might have been something personal or um. One of the things I suspected was that it was just like you broy an environment for Not long after, Francisco said there was another troubling incident. Uh, there's a growing incident. Somebody on the investment team grow up to an executive assistant. Um might get it up, putting him on unpaid leave for a while. And then um, he came back shortly before everyone was put on you know, let's go out basically where it was it? Where did

this happen? Just at the office or at the party? It was a yeah party, It was actually Mike's birthday. Everyone went out to a bar tonic con Pope and lots of shots. Um. The growing thing happened kind of r in the night. So that there's some early red flags. But so you've cat your it got your suspicion zone. But then you still you were still learning things. What else where you learning? Yeah? So I had my initial suspicions. UM. A whole theme throughout everything was just ridiculous spending UM,

and I like sports suites UM. And then I had some additional suspicions UM. The whole time River STUDIOSUM was in the same building. But Mike never really explained the funding situation. Let me explain a little bit. In addition to Rothenberg Ventures the VC firm, Mike has also set up another business, a production company called River Studios that made virtual reality videos, and he set up another business on top of that called River Enterprises, which was another

way of investing in companies. Francisco says Mike owned a major interest in these new businesses. They were supposed to be separate from the venture capital firm that Francisco worked for, which was managing other people's money. But Francisco was being regularly asked to do work for the other businesses, and that made him uncomfortable because he was supposed to work for just the VC fund. I felt like I'd been do by Mike. I felt like you know, I came in to build this l people at all, to make

things it's easier for the LPs. That turned out he was actually using it as you know, a way to mislead the LPs, like one of the one of the things that it was used for its sending out mass emails with notifications about the annual reports, and these funeral reports didn't tell the whole story. He left out big things. Francisco had access to the company's I T system, so he started doing some sleuthing. In a minute, we'll find out what he discovered, But first a word from our sponsor.

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Before the break, Francisco had started noticing some things that made him suspicious of the venture capital firm he just joined, and he started poking around on top of the lavish spending. Francisco would later discover internal documents that showed that the management fees the VC firm had collected from its investors. So this is the money specifically intended for operating the fund was actually being used by the virtual reality companies

that Rothenburg was funding instead. I kept escalating and escalating. UM. Also because I made the LP portal, I I asked to upload annual reports, so I look at those, and I'd see that these companies weren't disclosed them, Like there's zero mention of River Enterprises in any of the annual reports. UM. Zero I mentioned of River Studios and annual reports. UM. Also so that you're concerned that investors didn't even know that they were in sort of indirectly at least funding

some of these other activities. Exactly. Most people shrugged off what they were seeing at Rothenberg Ventures. I spoke with former employees who said that even though that they had

felt uncomfortable, nobody thought to step forward. And it might sound like Francisco's nitpicking these tiny technical details here, but I ran it by Andrew Touch, a professor specializing in financial regulation at Washington University School Law, and he said This sounds like a case of self dealing, which is when a person who's supposed to be looking out for the interests of investors instead takes advantage of his position

to benefit him or herself. Apparently the courts are pretty strict about this, Andrew said, this fidciary duty is the bedrack of finance of maintaining the trust between companies and their investors. At the time that Francisco did and get the benefit of that expert guidance, but he still felt

strongly that it was worth talking to the SEC. He'd read up on the responsibility that a fund like Rothenberg Ventures has two investors who have given it money, he felt it could be fraud if Rothenberg wasn't using the money in a way that he had told investors it would be used. Once he made up his mind, Francisco went to the agency's website SEC dot Go slash Whistleblower,

where there's a form to submit tips. It's a simple questionnaire where you describe the complaint and give the government some information about yourself, and there's a way to upload documents. In the complaint, he listed examples of how he felt funds were being misused so I submitted the forum. About a week later, I got an email from the staff attorney there. She asked me to go in. I went in for one meeting at their San Francisco office. UM,

we talked about the forum. She had a print out of the website which I had everybody's picture on it. So we spent some time talking about each employee, what their role was. It was, you know, like a nice office building on Montgomery Street. It was just the two of us in that conference room for that meeting, and then later on in subsequent meetings or more people. Francisco had a lot riding on this. He knew that coming

forward could cost him his job. If the SEC decided to do nothing against Rothenberg would still be worth it. Did you think that they could? You would be damaging your career in your future. Yeah, I knew that to some extent. I would be damaging my career. Why do you say, thatt, I'm just so sure that it was the right thing to do that, you know, Uh, it was worth that price that I'd have to pay. After that first meeting with the SEC, Francisco went back to

work like nothing was different. He began to live this somewhat double life. While working like normal, he was also corresponding with SEC sharing documents with them. Another information about Rothenburg. Getting access to these documents wasn't difficult. Francisco was in charge of it T at Rothenburg Ventures, so he had access to all kinds of things that others didn't like financial reports, email logs, and investor information. He'd copy them onto a thumb drive and then send them to the

SEC via email later from his house. Did you feel paranoying a little bit? Yeah, but I just didn't mention it to anybody, and um, I didn't feel that different. This double life didn't go on for long. A big turning point came just a few days later when he told the SEC that Rothenburg Ventures was making some changes to its I T systems and some of the email accounts were being deleted. This was in July of last year, soon after the SEC sent an order to Rothenberg Ventures

telling them to not delete any records. It was the first time that the firm knew it was in the SEC's cross hands. And then Francisco got a message to come to a meeting with two senior executives at the

firm Mike Rothenberg wasn't there. I was doing my work and then one of them sent me a text message and he said that he had an I T problem that he needed help with, so could I make sure I was in the office in a few minutes and I said, yeah, sure, and then I think about half an hour went by, and then he came by and

got me. I was sitting sitting out of couch in the main office there, and then he took me um into what was really Mike's office but wasn't in the office that day, just a small office by itself off that man room. And what happened? So his first question, UM was he said, UM, so we've noticed that you've been doing some government related searches and I didn't say anything to that. And then he said did anybody tell you to do that? And I said I'm not going

to answer that question. And then he said, well you're terminated effective immediately, um, and then long awkward pause, and then he said do you have anything to say? And I said, um, I have some personal lot ends of my desk a should grab and then he has started me to get that stuff and then out of the building. How did you feel after that, were you said, did you cry? Were you angry? I was? I was angry, like my heart was pounding. Um, it's mainly angry. Why

were you angry? That was unfair? Like you can't terminate what's the blower? Like that? Um? And this was immediately after they got a document preservation order from the SEC. That's probably what that's probably that's why they're suspicious. The SEC has declined to comment about the case, but tech Crunch reported Rothenberg Ventures is being investigated for wire fraud, bank fraud, and breach of fiduciary duty in law suits

from investors and employees. It's been alleged that Mike Rothenberg used money intended for the startups for his own benefit, it to support his own lifestyle, and Francisco learned from emails he had downloaded from the firm that at one point, Mike Rothenberg was paying himself about one million dollars, which is a huge amount for a relatively small firm, but

Rothenberg was also struggling to manage it all. Last year, Rothenberg needed to provide documents and tax information and some return on investment to investors, and according to Francisco, and some media reports the money wasn't there. Okay, so this is a little bit complicated, but stick with us. The records show that River Studios, which if you remember, is one of the virtual reality businesses founded by Mike Rothenberg

this started, received two million dollars from an investor. The same day, River Studios transferred one point seven million dollars to Mike Rothenberg's personal account. Also on that same day, Mike Rothenberg transferred once again one point seven million dollars from his own account to the Rothenburg Ventures account. According to Francisco, that gave Rothenberg Ventures the money to meet

the deadline of the other investors. By the way, that investor who wired the two million has now sued Rothenberg. The lawsuit alleges that Rothenberg co mingled the bank accounts of his various entities, essentially treating the accounts of those businesses as as personal accounts. By the second half of last year, employees Quentin mass and a class action lawsuit is working its way through the courts. It alleges that

staffers weren't paid. Another former employee has sued for more than a hundred thousand dollars that alleges Rothenberg didn't repay for business charges that have been put on a credit card. American Express is also sued for unpaid charges. I knew Mike Rothenberg a touch when I did that story back in so I reached out to him about Francisco and

to get his side of the story. He didn't respond, but a person who works for a New York PR firm that specializes in crisis management and image rehabilitation reached out. He told me Mike wouldn't be available for an interview given the ongoing investigations in lawsuits Adam did the spokesman comment at all about Francisco where the allegations made by him and in the lawsuits. He disputed Francisco's allegation that he was fired for speaking with SEC. He said that

Francisco had already given notice that he was leaving. Francisco says this is not true. The spokesman also pointed out that Francisco had this run in with authorities for the bitcoin exchange. He was implying that undermines his credibility. But what about the core allegations about misusing money. The spokesman declined to comment about the specifics. But Rothenberg did post a Facebook law I video earlier this year to explain.

So one of the things that I just wanna answer head on which I which I have done to the press, but they have not published it, and I want to be sure I'm very clear about this is the question I've had is you know, have you taken any money improperly? And the answer is no. And I've said that before and and uh it continues to that message continues to knock it out. There is clearly as it should. And another one is that have we made any investments without

investor permission? We haven't. We have not made any investments without investor permission. For those kinds of rumors going quickly, there has to be very responsible reporting and um, there has to be fair and balance reporting. And there's a very big um. There's a very big weight on the shoulders of reporters because those um that particular group of people. The video goes on and in it he spends a

lot of time blaming the media for bias coverage. Adam, you spoke to a few professors to better understand what kind of trouble that Mike Rothenberg and his firm might be in What I learned is the SEC has been pretty vigilant in protecting whistleblowers, including bringing actions against those who retaliate. So that means it will be pretty difficult for Rothenberg to come after Francisco for going to the SEC. Yeah, and I also learned that Rothenberg could be in hot water,

especially for what appears to be mismanagement of funds. Like we talked about earlier, fidiciary duty is the bedrock of finance. It's that trust between an investor and a person like Rothenberg who's investing that money on their behalf. Do you think there's a risk of jail time here? People I spoke with didn't think so, but there's definitely a possibility of financial penalties. And even beyond that, Mike Rothenberg's reputations

and tatters. Now that's right, and Rothenberg was this really ambitious venture capitalist, but now that the firm is a bare bone staff and the reputation has really been hurt. In addition to speaking with the SEC, Francisco also began communicating with a few journalists about what he'd been finding at Rothenburg, under the condition that they wouldn't name him. At that point, while the firm's big spending and lavish events were well known, the internal turmoil had been largely

kept under wraps. But in the months after that, several very tough stories came out chronicling Rothenberg's questionable management of funds. Francisco says that he never regretted the decisions he made, but it did take a toll. After he says he was fired, he made a last minute decision to join some friends going on a seven day hike in Sweden. On the walks, he talked about the ordeal with Justin Chen,

a friend who's also a software engineer. It's sort of that, and I realized that, oh, he wants to leave this city because he's worried about this. The Splice he was working at where he was terminated. Uh, I got the sense he was worried about it about like Mike Rothenberg

coming after him for a while, like physically. Justin says that even though this hasn't been easy for Francisco, he's in a much better position than most software engineering jobs are in big demand, and he'll likely have an easier time finding another job than somebody else might at Francisco's apartment, there's a messy bookshelf with some tea packets, notebooks, a few fantasy books, and on the top shelf we found one called The Whistleblower's Handbook, a step by step guide

to doing what's right and protecting yourself. Francisco said that he actually found the book only after he had gone through this whole experience of being a whistleblower himself, and he said he wished that he had read the book before approaching the SEC. Now he thinks more people will be coming forward in Silicon Valley. He says he hopes to inspire others to step up. Part it's a critical mask thing. Once you have a few of those stories out there, it's easier for more people to do it.

And then also I think that people are getting more fed up with the treatment, Like I feel like Silicon Valley is more unethical now than it was a few years ago. People are responding to that. And what why why do you think that? Um? I feel like, just because Silicon Valley's doing so well, it's attracting, you know, more more bad people who wouldn't have come here ten twenty years ago. People who were in it for the money,

people in it for the easy money. Yeah. Francisco is now eight and he's working on a startup idea and email security program for businesses. He continues to work with the SEC and says he's available to be a witness in any of the lawsuits pending against Rothenburg. He also says he's been applying for some jobs. He's invariably asked about his experience at Rothenburg. In one instance, he told them about his role blowing the whistle just to see

what the response was. He said there was a bit of nervous laughter, and then he didn't get a call back. And that's it for this week's Decrypted. Thanks for listening. If you work at a company where you suspect wrongdoing, get in touch with us. You can record a voice message and send it to Decrypted at Bloomberg dot net or I'm on Twitter at Satriano send me a direct message, and I'm at Akio seven. If you haven't already, please

subscribe to our show wherever you get your podcasts. While you're there, please leave us a rating and a review. This really helps more listeners find their show. This episode was produced by Pio Gadkari, Liz Smith, and Magnus Hendrickson. Thanks to Nico Grant, who helped with some of the research for today's show. Jeff musc has edited my story about Francisco for Business Week. Alec McCabe's head a Bloomberg

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