The First Step Is For Microsoft To Admit It Has A Problem

Finding The Last Sucker To Invest

from the how-the-game-is-played dept

Thu, Aug 21st 2008 5:59pm — Mike Masnick

Valleywag points us to a rather scathing profile of late stage "investment" firm Advanced Equities in Chicago. Valleywag refers to the operation as a venture capital firm, but the details suggest it's a bit different than a traditional VC firm, which tends to raise a fund and then invest it as deals come up. Instead, it looks like AE is more of an investment hunter. While it does appear to have some money under management, it sounds like other VCs come to AE to go out and find investors to invest in the latest round. Tellingly, rather than referring to these investors as "limited partners" like a regular VC firm, AE refers to them as "customers." And, from the Forbes story, it sounds like those "customers" are basically unsophisticated investors who don't recognize what they're getting into.

Rather than billionaires, say former AE brokers, many clients are doctors, lawyers and dentists who lack the sophistication of typical institutions and ultrarich VC investors.

As an example, they cite one such case:

In 1999 AE sold Constance Kamberos, now 82, $330,000 worth of "bridge" notes issued by Hymarc, a firm it backed. Kamberos says the notes were pitched as a relatively safe way to earn a 12% yield. When she didn't get paid by Hymarc, Kamberos visited AE in Chicago's Loop. After she had a heated exchange with Daubenspeck, AE had the cops haul her away, Kamberos says (AE says she visited repeatedly and was hauled out by building security)

These aren't stories you hear with a typical VC firm. These sound more like stories you hear from "boiler room" operations tricking unsophisticated investors out of their hard-earned savings. Yet, as Forbes notes, big Silicon Valley VC firms like Kleiner Perkins and NEA love to talk up AE. Hmm. Then, let's recall that the IPO market has pretty much dried up for startups lately, and you can start to put two and two together.

In the bubble years, the "business model" of certain venture backed startups, was basically to sell equity to the last sucker. In the late 90s that was the public market -- consisting of a bunch of unsophisticated retail investors who would overpay for junk. But it's harder to get access to the public markets, and at least a few of the suckers have learned at least some of the lesson. However, if you can convince those suckers that they're getting in on a special deal -- say a "late stage, pre-IPO startup backed by the biggest names in Silicon Valley" the lessons learned from the last bubble go out the window. Reading this, it would appear that AE's function is to bring those "last suckers" to these startups and their VCs without going through the painful public market IPO process.

What's not clear is whether or not the VCs (and startup founders?) are taking money off the table directly during these late stage financings -- but it wouldn't be all that surprising (such deals are increasingly common these days). And, it would explain situations like the one in the Forbes article where AE helped gather up $45 million from "customers" to invest in a company called Agami. Five months later, the company no longer existed. Even people who worked at the company had no idea what happened to the money. The Forbes piece also notes that AE often pumps up the valuation of the startups in question, meaning that an earlier stage VC could be selling its shares as part of that "investment" (i.e., the money would go straight to the earlier investors, rather than the company), allowing them to still get a positive ROI on a company about to go broke.

If the Forbes report is accurate, then it certainly sounds like VCs may have figured out a different way to find that "last sucker" it needs to cash out certain investments without having to take a company public. It doesn't necessarily sound illegal (though that may depend on the details -- and there are apparently a bunch of lawsuits floating around AE). Never underestimate the ability of early stage investors to eventually find a bigger sucker to take their bad investments off their hands.

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Filed Under: investors, ipos, public markets, venture capital
Companies: advanced equities

17 Comments

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Dan, 21 Aug 2008 @ 7:04pm

It,s just a matter of time before some disgruntled "customer" pays them a visit and goes postal. Then they may understand what "consequences" are.
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John, 21 Aug 2008 @ 7:28pm

Re:
That is the stupidest thing anyone has ever blogged!!
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LBD, 21 Aug 2008 @ 7:39pm

This is why
This is why I manage my own investments based off of what the company makes and the quality of product as opposed to off of market value
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Anonymous Coward, 22 Aug 2008 @ 5:53am

The problem is . . .
suckered or not, its just tough to have much sympothy for someone who CAN stroke a check for $300,000.00 upon request.
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deathbychichi, 22 Aug 2008 @ 3:31pm

Founders get nothing
The founders only ever cash out in the event of an IPO. The money AE raises goes to AE and (some of) the earlier investors, never to the founders.
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Andy Freeman, 25 Aug 2008 @ 10:00am

> The founders only ever cash out in the event of an IPO.

That's not a law and some founders have gotten cash out pre-IPO. Whether (and how) it happens in a specific case depends on how the deals are structured.

VCs typically don't like to let founders cash-out before them, but VCs don't care once they're out. (And, some VCs have decided that it's better to let founders get a taste pre-IPO to keep them motivated.)
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Rasheed, 25 Aug 2008 @ 1:55pm

Sounds dubious to me, whats the difference between this scam and any other 419 scam?
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Bill, 27 Aug 2008 @ 3:21pm

Paydirt
This article is weak. Investors invest at their own risk. If I told you to jump off a cliff...would you?
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Abner, 22 Oct 2008 @ 6:00pm

Advanced Equities
AE is indeed a boiler room operation. I worked there. Small investors' assets were rolled up into a 'fund' that Dwight and Keith controlled and invested alongside HNW types. Dwight and Keith charge 10% off the top as well as warrants. They would pay out 2.5% to the brokers and promise warrants (which they never paid us). The turnover in their shop is at true boiler room levels - eg, >50% per annum. They sucker brokers in with an enticing story of investing alongside the big name VCs. They sucker clients in by claiming the money raised is going in at the 'last stage' before IPO. They are shameless. They are dishonest and bald-faced liars. And, some day, they will most definitely be caught by FINRA (they are on FINRA's watchlist now).
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Anonymous Coward, 8 Dec 2008 @ 4:10pm

Re: Re:
I Disagree, Dwight and Keith are begging for retribution.

I have dealt harshly with a person in a similar situation involving a disreputable business and my mother's trust and money. I am not a criminal and didn't hurt anyone but my mother go all of her money back - immediately.

You can get more with a kind word and a pack of viscous lawyers than you can with a kind word.
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Anonymous Coward, 8 Dec 2008 @ 4:24pm

Re: Advanced Equities
Looks like you nailed it. See the following:

http://venturebeat.com/2008/08/21/advances-equities-takes-its-investors-on-a-bad-trip/

Profiles of Keith Daubenspeck, Kieth Badger:

http://www.advancedequities.com/team.php
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Anonymous Coward, 8 Dec 2008 @ 4:29pm

Creepy scum balls never seem to know when to give up...
These guys are complete low life slime. Now they are suing 83 year old Constance Kamberos after losing a legal decision to her:

From: http://www.tmronline.com/A55951/tmrarticles.nsf/e17dd6a94826afb586256923007a8b6b/6c369f789f21dbd6862 574ea0078b551!OpenDocument

Article from: Investment News Article date: December 20, 2004 More results for: advanced equities inc. | Copyright information

COPYRIGHT 2004 Crain Communications, Inc. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights should be directed to the Gale Group. (Hide copyright information)

Byline: Bruce Kelly

NEW YORK - A Chicago retail broker-dealer/midmarket investment bank has taken the unusual step of suing a client in federal court after losing an arbitration case. The firm, Advanced Equities Inc., said three NASD arbitrators "exceeded their powers'' and were "unfair'' in making a hefty $327,000 award to the client.

After losing the case in October, Advanced Equities and its chief executive, Keith G. Daubenspeck, late last month sued the client, Constance Kamberos, in U.S. district court in Chicago, seeking to eliminate the damages.

Ms. Kamberos' lawyer, Andrew Stoltmann, meanwhile, said Advanced Equities and Mr. Daubenspeck filed the suit to ...
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AEIembaressedIworkedtheir, 13 Feb 2009 @ 8:53am

I worked at AEI
I will add my own experience working their with a simple story of a new sales manager hired in Nov 2008 a certain Bobby Settaducati (sp?) a truly "oily" dirtbag outta Chicago that when he introduced himself to the brokers in the San Francisco office immediately started to explain his SEVERAL issues on his CRD???!!!! and repeated "problems'in the past with other firms or clients he had worked for. How's that for an introduction. They have to be the scummiest of all bucketshops and they will never pay you if you drop a big ticket, they'll just fire you. I saw it more than once. When they let me go I was so relived I was giddy as I am sure that FINRA or NASD or "someone" will come in their and clean house soon, their also dying as their story is getting old and tired. Stay away and warn your HNW friends of this firm!
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Anonymous Coward, 10 Mar 2009 @ 12:54pm

Re: Re: Re:
You clearly haven't met or dealt with Daubenspeck & Badger.
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Jason Schroeder, 29 May 2009 @ 8:42pm

Advanced Equities--yet another new fund under a different name
Advanced Equities is now trying to raise a cleantech fund with Sr Mg Partners who represent themselves as "successful" with significant prior experience. The Doctorate degree of one of the Sr Mg Partners is fraudulant, so is his claimed "successful" investment record--- bankruptcy expertise is the only real experience he possesses and if you look closely, you note he has zero prior business experience. Amazing, when will investors start doing their homework, and when will the SEC start investigating!
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Ed russell, 8 Oct 2009 @ 4:17pm

Re:
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exAEI, 1 Nov 2009 @ 10:03am

Add me to the list of those who worked there. All the assertions about the warrants & the turn over & the filthy track records of the guys running the place are true. The scam seems to be supported by the purchase of First Allied, a network of independent brokers (based out of San Diego). They also seem to get a lot of their funding from their board, mainly an investor named Tim something or other.

While I was there they were audited by both the SEC and the NASD. As, at the time, they had never even provided quarterly statements to their investors, it was obvious those watchdogs were toothless. Both investigations yielded a slap on the wrist: nothing more than requests for cosmetic improvements.
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