The FBI is investigating Mithril Capital for financial misconduct | Hacker News Reader

The FBI is investigating Mithril Capital for financial misconduct

vox.com

84 pointsdanso35 comments

>> Royan has frustrated some of his investors by sitting on some of their money rather than investing it in startups — while almost certainly raking in millions of dollars in fees for himself.

its the first time i hear about legal consequences of not doing anything to the funds' money. the investors are free to leave the fund if they are not happy with the management, right?

Not necessarily. Many VCs, hedge funds, etc., have restrictions on redemptions (amounts, timing, etc.).

I think the frustration here with the management fees is that it's out of alignment with the staff size (lots of departures) and operational expenses (recently moved to tax-free Texas, just minimizing costs even further).

Theoretically, if he has fiduciary duty, he has to act in the best interest of his clients. I'm not sure if he has that duty (I've googled but can't find anything) but if he did they could argue leaving money in cash is clearly not what's best for investors.

Yea but investing in a startup is far from a sure thing. They could easily lose their money

It's possible that the best performing startup fund will be one that invests in nothing, collects a fee, and returns the rest of the money later.

It's possible the best performing knee surgeon will be the one that doesn't perform knee surgery, collects a fee, and returns your knee in the same condition it was in.

Nonetheless, that would be fraud.

> the best performing knee surgeon will be the one that doesn't perform knee surgery, collects a fee, and returns your knee in the same condition it was in.

Why not? Eg: "Sorry sir, but as you are a weak/old/high-risk patient, knee surgery would be very dangerous — my advice is to stay in a wheelchair"

This situation occurs fairly regularly with cancer when they find out it's inoperable once they open you up. You still gotta pay for it though.

That’s called a consult fee!

Or a salary.

The data on the ineffectiveness of common surgeries is overwhelming, yet they continue to be performed, because compensation is tied to it.

The "Do something" syndrome is strong - https://fs.blog/2015/06/do-something-syndrome/

I think it was Taleb who said the best way to assassinate a public figure is to provide them with a personal physician

But these clients have already expressed a desire to invest in startups. If your idea of working in their best interest is to "not invest in startups" then you shouldn't take the capital (and fee$) in the first place.

I agree that if everyone is being ethical then that is the right thing to do. I'm just worried about the situation where a fiduciary might actually be doing what they think is best by waiting for a better opportunity and I'm not sure how you judge whether they are doing that criminally or sincerely.

I imagine the burden of proof would be pretty high. Like you said, it's hard to prove.

They need to prove he was acting maliciously. These cases are hard to win because you can easily say you thought you were doing the right thing.

I don't consider investments over cash to be clearly better. There is the idea of a "cash is king" economy, when investments are exceedingly cheap due to liquidity in the market. But to capitalize on these events, you need to have the cash on hand for it.

Berkshire Hathaway is well known for sitting on mountains of cash if they don't have access to what they feel are good investments.

Isn’t he operating a VC fund? Shouldn’t he just be doing capital calls for the fund when needed versus sitting on cash typically?

I've read recently that some if not all brokers are largely supported on the money they make on uninvested cash balances, so they actually would be better off if their customers didn't do anything.

What if the startup ecosystem took a downturn, and it lost 50% its total valuation?

Would investors then have a problem with Mithril sitting on the money, doing nothing?

Investments shouldn't be judged in hindsight, the ends don't justify the means, etc.

Hindsight is the only meaningful metric for investments. Was it a good bet or not? Full stop.

That's like saying the supreme court's verdict is the only metric for whether something is constitutional. If that's so, then where do they get their rulings from?

You're implicitly denying the difference between correlation and causation.

> has fiduciary duty, he has to act in the best interest of his clients

Reminds me of a friend who was sued in 2009 for parking a trust in CD's at three and a half percent.

I think the implication is that by taking a fee, they were implicitly saying that work was done. But the investigation seems to be about whether they were actually doing anything with the money.

Making a prudent decision to sit on cash when there are no good investments is one thing. Planning to defraud your investors is entirely another.

Nope. Most funds have capital locked up. Ironically, this is kind of clear if you consider what would happen if the money was actually invested. You can't buy a company, and then just sell off shares in tiny batches when your investors need it. This is also why the liquidity crunch in 2007 was so severe, tons of people had money in funds that were locked up (and tanking) so they just sold whatever they could.

Btw, this is a huge problem with the industry. PE funds, VC funds, property funds...everyone does it. You even see mutual funds do lockups. It is a joke (and happens because liquidity transformation i.e. turning nonliquid stuff liquid is a fundamental part of the financial cyle).

The industry approach on this also varies. When it comes time to calculate fees, you pay based on the full amount. When it comes time to calculate performance, the numbers often leave out the opportunity cost of having your money tied up in govt bonds for months whilst the manager dicks about milking transaction fees from portfolio companies. Tails you lose, heads they win.

Seriously: the industry is a joke. Yes, some great people. The majority are not. Your average PE/VC fund is stocked with investment bankers who have never taken risk, have no idea about business (and, frankly, no interest), and are only concerned with earning fees on transactions. The number of people who are actually able investors is very small. They aren't being churned out of Oxbridge and Harvard (great salesman though...yes, and being able to convince a client they should thank you for a dogshit product is the real money maker...much easier than actually doing anything valuable).

Fwiw, I actually think Thiel is fairly competent if overrated (it doesn't sound like the issue is with Thiel either). Contrary to the article, he doesn't have a particularly good reputation either. He had one or two great investments but his macro fund perf was relatively poor. Definitely nowhere near wizard status (as an investor, as tech bullshitter he is obv legendary).

This is a great comment.

> the investors are free to leave the fund

A venture capital fund isn't a checking account. You don't just withdraw from it. Funds deposited are governed by complicated contracts specifying how they'll be managed, and how their status will be reported. Failing to do this correctly for sure would be an SEC-enforceable thing, though I'm not expert enough to know exactly what they FBI sould get involved.

I don't think it's as simple as "not making enough investments"; there's also concern about the structure of Mithril (the fees go to a management company in the Caymans that Royan may own the overwhelming majority of, and the fees don't seem to track the staff that Mithril actually has).

The question has been answered, but to give you a sense on the liquidity restrictions I thought I'd give an example. This is pretty typical - Every year, at the start of the fiscal year, the investor can take out 25% of their capital. If they do so, then the next year they can withdraw 33% of their capital. If they take that redemption opportunity, they can withdraw 50% of their capital at the start of the next fiscal year. Finally, if they take that 50%, they are able to take the remainder of their capital a year later.

What exactly is the alleged financial misconduct - is it just not investing money?

That doesn't make too much sense to me in terms of incentives. The VC will make this fee no matter what they invest in. They make more money if their investments go up, and they make the same amount of money if their investments go down. So there isn't really an incentive to sit on the money and do nothing. If anything VCs have an incentive to invest in stupid investments rather than sit on the money..

Article reads like a hit job on Thiel, as if he 's anyone's darling

> who heads an enormously influential network of tech investors, startup founders, and political allies across Silicon Valley.

I thought nobody liked him there, thats why he left?

I wonder if they are using Palantir in the investigation...

For a second I though LH of mithril.js started a hedge fund.

I thought for a moment that Moria is the Mithril Capital of Middle-Earth, so "FBI Investigating Moria" would be a bit...

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