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Sometimes scandal lingers just below the surface.  Dig a little, or a lot, and you can uncover a trove of sordid detail.  Other times, no matter how much you dig, there’s just no news.  No matter how hard you look, even behind the specter of impropriety, there’s nothing to report. 

Late Tuesday, the Wall Street Journal ran a story looking into tips about alleged fiduciary failures at venture firm Insight Venture Partners (IVP).  At first glance, it had all the makings of real trouble: an anonymous tipster, a substantial return on investment, and an apparent conflict of interest too.  On closer inspection, however, looks are deceiving.

At issue were private investments made by IVP employees and their affiliates in online photo-sharing service Photobucket.com.   More than two years ago, the group comprised of the employees, their friends and family bought 20% of Photobucket for $3m.  When News Corp bought Photobucket last year, the $3m investment became worth more than $40m.  $300k personal investments by two IVP partners became worth about $5m each. 

IVP as an entity  made no formal investment and their fund’s limited partners consequently saw no return. As the WSJ put it “investors in Insight’s technology fund – so-called limited partners such as the California Public Employees Retirement System and Yale University’s endowment – made nothng.”  The inference in that is that the Investment managers were investing for themselves and ignoring their clients, the limited partners who’s money they’re tasked with managing. It sounds like scandal.  (The WSJ report called it “a dicey game.”)

And an anonymous tipster wanted the story out.  According to separate coverage by both Rafat Ali at Paid Content.org and Peter Kafka, at Silicon Alley Insider, in late July (July 31) emails were circulated to  both news sites (and others)  making the same claim that IVP had acted inappropriately.  According to the Paid Content report, the emails detailed substantially the same story the WSJ investigated. 

For all the digging, however, there appears to be no story. 

The thing about real scandal is, someone has to be harmed.  Something actually inappropriate has to happen.  The personal success of a few investors doesn’t amount to that.

As the WSJ noted in its own coverage (which in fairness does provide both points of view), many firms have lawyers and compliance officer’s tasked with vetting investment opportunities against potential conflict.   Often, personal investment outside the scope of a fund is allowed.

If for example, a mutual fund advisor focused professionally on Oil and Gas investments, happens to have great success making personal investments in Apple stock, it’s accepted.  Nobody would likely suggest the fund should have also invested in Apple.  The same is true in private equity investments.   If a fund is oriented toward large biotech investments, personal investments by its staff in small software ventures are often absolutely reasonable.

In IVP’s case, their fund is focused on late stage investments.  That means they typically invest in companies in the later stages of the development cycle, companies with substantial revenue and an established business models.   The scale of these investments is usually above $25m per deal as well.  (See the list of IVP portfolio companies at the end of this article)

Photobucket wouldn’t have matched IVP’s minimum investment criteria.  Investing a few million in a developmental (early) stage startup is not IVP’s business.  To commit money there, in fact, being outside the scope of investment under which IVP raised its fund, would probably be a problem itself. 

Not surprisingly, that is exactly what Insight partner Jeff Horing explained to the WSJ.  Insight’s law firm, O’Melveny and Myer’s expressed the same.  They said the investment was “in full compliance with the letter and spirit of all of Insight’s agreements with its limited partners.”

Looking at it there doesn’t seem to be much to talk about in Insight’s behavior.  Sure, there could be an intellectual and protracted discussion about the ethical issues involved when investment managers make personal investments but these are not new practices, and that’s not the subject that’s been raised directly. If it were, there could be talk about “Side Funds”  which allow fund general partners to invest their own money alongside their firm’s. They’ve been around for years.  

Here, however, there seems no reason to question Insight.   But why was someone so anxious to get this story told? That seems like the dirt to dig up.  That’s the question rightfully being asked.

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LIST OF INSIGHT’S PORTFOLIO COMPANIES: