New York's comptroller is examining a state investment program for young technology businesses, including investments made by a local venture capital firm, according to two sources familiar with the matter.
Investigators for state Comptroller Thomas DiNapoli have been gathering information about possible discrepancies between a financial report sent to shareholders of a Long Island technology startup and reports about that startup and others sent to state and federal overseers of the Innovate NY Fund. The program invests in tech startups across the state.
The examination centers on the Brookville-based venture capital firm Canrock Ventures and its investment of Innovate NY money in information technology startup General Sentiment Inc., also based in Brookville.
DiNapoli staffers are collecting information about the close ties between Canrock, General Sentiment and three other local startups. Canrock invested nearly $2 million in Innovate NY funds in the four companies, according to the two people.
Asked about the comptroller's examination, Canrock managing director Mark Fasciano said Thursday, "We have not been contacted by the comptroller's office on any matter, nor are we aware of any investigation. As we have stated clearly in the past, Canrock has complied with the Innovate NY program guidelines from the start, and the companies continue to advance to build value and generate a return for shareholders, employees and their clients alike."
Innovate NY is a 4-year-old program, consisting of $35 million from the U.S. Treasury Department and $10 million from the Goldman Sachs investment house. Eight venture firms picked by the state, including Canrock, select the investments.
DiNapoli's examination is the third inquiry into Innovate NY since Newsday began asking questions in fall 2013 about a $500,000 Innovate NY investment made by Canrock in General Sentiment. The venture firm had already reported a 46 percent ownership stake in the startup, whose board of directors was led by Canrock's Fasciano.
A U.S. Treasury probe of Canrock's use of Innovate NY money is ongoing as part of a wider audit. Empire State Development, the state agency responsible for Innovate NY, has concluded an investigation but has yet to make its findings public.
DiNapoli's inquiry is one of several that he's conducting into the efficiency, cost and results of New York's initiatives to promote business, tourism and employment.
"I think it is an appropriate time after a number of years of state dollars going into the various economic development programs. . . . What are we getting for this effort and for these resources?" he told Newsday. "Do we have a rational approach in how these resources are allocated? How these initiatives are being managed?"
DiNapoli spoke generally about his audits of Empire State Development programs and did not comment on Innovate NY because his office "doesn't discuss the specifics of audits that are underway or may occur in the future," DiNapoli spokeswoman Jennifer Freeman said.
The sources said the DiNapoli examination, like the Treasury audit, will eventually cover all aspects of Innovate NY.
Reports, ties targeted
One avenue of inquiry, the sources said, is the yearly reports that Empire State Development must send to Treasury about Innovate NY. The reports are required because federal money is being invested.
The 2013 report, based on data from the venture capital firms charged with investing Innovate NY funds, said yearly revenue for General Sentiment was $934,000 for the twelve months ended Dec. 31, 2013, according to a copy obtained by Newsday. That's $196,600 higher than the revenue total in General Sentiment's 2013 year-end financial report given to its shareholders, which Newsday also reviewed.
DiNapoli's staff has asked for an explanation of the revenue discrepancy, the sources said.
General Sentiment shut down weeks ago after failing to "attract capital" from new sources, according to a June 24 notice to shareholders that was reviewed by Newsday.
Empire State Development spokesman Jason Conwall said Thursday that the agency "has not been contacted by the comptroller's office about this matter."
Another subject of the comptroller's inquiry are the ties between Canrock managing director Fasciano and four of the startups that received Innovate NY money via Canrock, the sources said. Those startups are Karma411 (now called Crowdster), Sentiment Alpha Capital Management, Thrive Metrics Inc. and General Sentiment.
Fasciano co-founded each of the startups and is chairman of the board of directors of three of them.
Investigators are reviewing whether Fasciano's involvement constitutes a conflict of interest prohibited by Treasury rules. He has said repeatedly that they do not.
Canrock disclosed the connections to Empire State Development in its February 2012 application for Innovate NY.
'Clear conflicts of interest'
The four startups have been housed in Canrock's business incubator at LIU Post in Brookville. Each incubator tenant has paid a monthly "shared services" fee to Canrock, a portion of which went to Fasciano's salary and that of Canrock managing director Jim Estill, Fasciano said in January 2014.
As Canrock negotiated its Innovate NY contract with Empire State Development, then-Canrock chief financial officer Steve Black said the shared services fee could violate Treasury's conflict-of-interest regulations.
In a Sept. 19, 2012, email to state officials, Black referred to the conflict-of-interest prohibition and then wrote, "This would be problematic for shared services."
Empire State Development has denied receiving this communication and some other disclosures that Canrock said it sent.
In a March 21, 2014, letter to Canrock's Fasciano, Steven Cohen, the agency's then-deputy commissioner, wrote that Canrock's ownership stake in the startups "constitute clear conflicts of interest" that the venture firm "did not disclose . . . this failure has proven detrimental to ESD [Empire State Development]."