Venture firm says emails show it notified NYS of potential conflicts in its investments

A federal investigation has led New York State officials to accuse a Brookville-based venture capital firm of failing to disclose possible conflicts of interest occurring when the venture firm invested federal money in local companies in which it had a large stake.

However, emails requested by Newsday and provided by Canrock Ventures show that Canrock reminded officials at Empire State Development of one of the venture firm's potential conflicts days before the agency allowed it to invest $500,000 in General Sentiment Inc.

A spokesman for Empire State Development, the state's primary business-aid agency, said Wednesday night that the emails do not constitute sufficient notification by Canrock to the agency of a conflict. He also said Canrock violated its contract with the agency by not using a committee to report the conflict to the state.

Canrock -- the venture firm chosen two years ago to handle investments on Long Island through the state's Innovate NY Fund -- first disclosed its 46 percent ownership stake in General Sentiment to Empire State Development in February 2012. A Canrock executive reiterated that possible conflict in an email exchange a year later, as Canrock prepared to make another investment in General Sentiment.

The General Sentiment investment, along with Canrock's investment of $1.3 million from Innovate NY in three other technology startups in Nassau County, is being reviewed by the U.S. Treasury Department to determine whether conflict-of-interest rules were violated.

While New York State administers Innovate NY, two-thirds of the $45 million in the fund comes from Washington.

The federal probe led Empire State Development last year to freeze nearly $4 million from Innovate NY that had been earmarked for investing in Long Island startups, drying up an important source of funding for small tech businesses. In the first nine months of this year, $10 million from the program has been invested elsewhere in the state.

Empire State Development officials first told Newsday in March that they didn't know about the potential conflicts in Canrock's use of Innovate NY money. Later, the officials said the venture firm had failed to notify them of conflicts immediately before making each investment.

But the email messages show Canrock disclosed one possible conflict three days before putting Innovate NY funds into General Sentiment.

In an email sent on Jan. 22, 2013, Steve Black, then Canrock's chief financial officer, described in detail to Sharon Rutter, a program director at Empire State Development, how the venture firm had made five loans to General Sentiment in 2010-12.

Further, Black said Canrock wanted to convert the loans into 2.9 million shares of the company's common stock. General Sentiment subsequently valued the shares in a financial statement at more than $2.5 million.

Rutter acknowledged the email, saying, "can you call me on this?" in a reply.

Canrock eventually received the go-ahead from the development agency and the General Sentiment transaction was completed on Jan. 25, 2013, in the way Black had outlined in the email exchange, according to Canrock executives.

Brookville-based General Sentiment tracks public opinion on the Internet about topics such as consumer products, entertainment, politics and sports.

Newsday requested a copy of the email and other documents from Empire State Development more than a year ago under the state Freedom of Information Law. The agency has yet to fulfill the request.

Black did not respond to a voicemail seeking comment Wednesday. Rutter referred inquiries to the agency's spokesman, Jason Conwall. 

Conwall said: "The email exchange in question was about matching fund requirements and not a potential conflict of interest. Furthermore, it did not contain information on the ownership percentage of Canrock Ventures' principals or other information necessary to evaluate a potential conflict."

Conwall also said that Canrock's 2013 contract with the agency "clearly states the requirement to raise potential conflicts of interest directly, and the appropriate mechanism for Canrock to do so. In this regard, Canrock did not comply with the requirements of its contract."

Asked to comment on the content of the email, Canrock managing directors Mark Fasciano, Jim Estill and Ted Smith said in a statement that Rutter "was asking for additional detail about prior ownership investments they [ESD] would later approve" in General Sentiment -- "proving that ESD knew about it and approved of the strategy."

The directors, in written responses to a reporter's questions, said Empire State Development never asked about potential conflicts involving Innovate NY investments in Karma411 (now called Crowdster), ThriveMetrics and Sentiment Alpha Capital Management.

Fasciano co-founded each startup, along with General Sentiment. He also is chairman of the board of directors of three of them.

Fasciano's connections to the computer software businesses were disclosed to Empire State Development in Canrock's February 2012 application for the Innovate NY program. They also can be found on the website of each startup or on the Canrock site.

The four startups are housed in Canrock's business incubator at LIU Post. Fasciano said in a January interview that incubator tenants pay a monthly "shared services" fee to Canrock, a portion of which goes to his salary and that of Estill. He also said some Innovate NY money was likely used to pay the fee.

"ESD was well aware of Canrock's deep involvement in all these companies immediately prior to each Innovate NY investment," Fasciano, Estill and Smith said. "The details of all these investments were discussed at length with ESD officials."