Big Investors Pull Millions From L.A. Venture Capital Company

For a time, the 30-something venture capitalists were flying high, backed by tens of millions of dollars from Harvard, Boeing and other big-league investors, and consulting with such disparate advisors as the Columbia University business school dean and KISS singer Gene Simmons.

Calling themselves International Technology University, the sneaker-clad partners with the Century City address scoured top engineering schools, seeking new technologies to turn into profitable businesses.

Over the last six years, the duo, friends since their student days at Tulane University in the 1990s, persuaded investors to entrust them with $250 million to use as seed money.

The two funded 36 start-ups, several of which turned healthy profits. But last month, their fortunes turned. Their most prestigious investors -- Harvard University and public pension funds in California, Colorado and New Mexico -- pulled $120 million out of the firm, cutting off much of the company’s cash supply.

A big reason: The investors were troubled that the two partners, Chad Brownstein and Jonah Schnel, solicited political contributions from the fledgling firms they financed, and several obliged.

Start-ups in Colorado, New Mexico and California gave about $68,000 to California Controller Steve Westly, an influential member of the state’s public pension board who was running for governor at the time.

State and federal laws prohibit venture capitalists from requiring political giving by the companies they finance. Political contributions from fledgling companies to politicians in other states raise a red flag, said Edward Siedle, an expert on pension malfeasance and a former attorney with the U.S. Securities and Exchange Commission.

“When we investigate these things, that is one of the telltale signs that there may be a quid pro quo going on,” Siedle said.

In July, officials in two states took the unusual step of calling on ITU to repay the pension funds, or reimburse the start-ups the money that was donated -- a sign of pension boards’ increasing sensitivity to perceptions of cronyism. Corruption has tarnished several retirement systems in recent years, bruising boards in San Diego, Chicago, and Philadelphia.

Brownstein and Schnel say the start-up firms’ political giving has no connection to ITU’s business. Although ITU suggested that the start-ups make political donations, Brownstein and Schnel put no pressure on them to do so, the pair said. They feel victimized.

“There is nothing illegal here. There is nothing illicit,” said Brownstein. “This has been a huge disruption to who we are and what we do.”

The states asking that the money be returned are Colorado and New Mexico, both of which had also made earlier investments in ITU. One start-up in Colorado and one in New Mexico each donated $20,000 to Westly’s failed gubernatorial bid. Three ITU-funded start-ups in California gave the controller a combined $28,000.

Brownstein and Schnel say they cannot cover the cost of donations made by other companies, because doing so would mask the true source of the money. Stephen J. Kaufman, an attorney hired by the men, said that what Colorado and New Mexico are asking them to do “is completely illegal.”

Brownstein and Schnel say their investors’ main concern was the departure of several key ITU employees, and questions about the political contributions -- made before the big leaguers put their $120 million into ITU -- aggravated matters.

“The fact that this political stuff got brought into the conversation threw gas on the fire,” Schnel said.

Officials at Harvard and in the three states refused to discuss their decision, but public records show that they began dissolving their partnership with ITU in July. Executives at the start-ups that gave to Westly either did not return phone calls or declined to discuss the issue for the record.

Kaufman, the ITU attorney, said he contacted nearly all the companies that gave money and concluded they were “not pressured into making any contribution.”

The contributions at issue were among many that ITU has given to, or solicited for, elected officials connected to government pension funds. Many such funds place large amounts of cash in venture capital firms in hopes of reaping sizable returns.

ITU’s principals and associates have given $19,500 to Westly and $20,000 to state Treasurer Phil Angelides, who defeated Westly in the June gubernatorial primary. These donations are not in dispute.

Westly spokesman Russ Lopez said the controller has met with Brownstein privately -- including meetings in New York, where Brownstein introduced the controller to other potential donors -- but Westly never intervened on ITU’s behalf at the California Public Employees’ Retirement system.

Since founding their firm in 2000, Brownstein and Schnel have helped launch several small technology companies from the laboratories of UCLA, UC Berkeley and other universities. The companies were ultimately bought by such corporations as Nokia and Advanced Micro Devices. Such sales netted millions of dollars for ITU and its investors.

Along the way, the two struck up relationships with Columbia Business School Dean R. Glenn Hubbard, the former chairman of President George W. Bush’s White House Council of Economic Advisors. In addition to relying on Hubbard’s advice, they hired rocker Simmons to help the start-up companies develop marketing plans for entertainment-related products.

Brownstein is the son of Denver attorney Norman Brownstein, a major donor to pro-Israel political candidates and causes.

Another of the early principals at ITU was Adam Winnick, a childhood friend of Brownstein’s. Winnick’s father, Gary, founded the now-bankrupt telecommunications network provider Global Crossing Ltd. and was once described as the richest man in Los Angeles.

Gary Winnick was one of ITU’s initial investors, giving millions of dollars to help launch the company.

In 2005, ITU proposed that the Los Angeles fire and police pension board invest $5 million in the company. The board rejected the bid, saying ITU’s management fees were too high.

In August 2005, Mayor Antonio Villaraigosa appointed United Food & Commercial Workers union leader Sean Harrigan to the police and fire board. That month, ITU donated $3,000 to a political action committee controlled by Harrigan’s union. In October 2005, Harrigan joined other board members in voting to approve the $5 million investment in ITU.

Harrigan did not return phone calls from The Times.

Brownstein, a longtime supporter of Jewish causes, said his company gave money to Harrigan and others, mostly because they were “strong supporters of the state of Israel.”

Westly, Brownstein said, “is a guy who is incredible on the state of Israel. And he is a founder of EBay. And if this guy were governor, the environment for technology would be amazing. That is all we think about.”

In July and early August, Brownstein and Schnel tried to persuade their big investors not to pull out, meeting with them and obtaining letters from several of the companies they funded attesting to the pair’s business and ethical standards.

They also sent investors letters describing political giving as normal in the tech world. “Federal and state funding is critical to many venture-capital backed companies, particularly early stage technology investments, and political contributions are a common business practice.”

Contracts between ITU and its investors do not address campaign donations. But they contain a clause that permits investors to pull out for “no reason or for any reason,” and the $120 million was withdrawn despite the men’s entreaties.

The pullout, they wrote to their investors, “may destroy the ITU brand that we have created so carefully.”

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evan.halper@latimes.com

dan.morain@latimes.com