Trending in the news this week: Audax Group, Canopy Financial, Chamath Palihapitiya, Eric Schmidt, Henry Ellenbogen, Identified, Indiana Public Retirement System, KPS Capital Partners, SecureNet, Sterling Partners, T. Rowe Price and Bill and Tim Draper.

Court documents filed with Canopy’s Chapter 7 bankruptcy today show that the company owes nearly $26 million — most of it to holders of Health Savings Accounts that were managed by Canopy or one of its partners.

The difference between what Canopy thought was in the accounts and what remained there as of November 30 is nearly $20 million. Thousands of accounts are affected — the documents show that 13,697 accounts, with a balance of more than $17 million, were held by Coventry Health Care. Coventry is reimbursing its account holders and has filed a claim to get the money back from Canopy.

Other account holders include Dewitt Stern, FlexRight, ISU Financial Services, Shawnee Administrative Services, Veritas Health Systems Administrators and Canopy itself, through its Wellfund program.

Account holders may have a tough time getting their money back, though,

The beleaguered startup has asked a federal judge to convert its petition for Chapter 11 bankruptcy into a Chapter 7, which means it will shut down. A hearing is scheduled tomorrow on this and several other issues in Chicago.

Under Chapter 7, all disputes over Canopy’s finances will be handled by an independent trustee who’s been appointed by the court. That means all of Canopy’s creditors — including those people who deposited money in a Canopy Health Savings Account and expected to use it to pay their medical bills — will now have “one throat to choke,” said a source close to the company.

Canopy’s HSA account holders have been left hanging for three weeks.

Ever since the Canopy Financial scandal broke last month, there has been lots of speculation about existing investors cashing out during the company’s July financing round. peHUB has now learned that $40 million of the $62.5 million deal was used as liquidity for Granite Global Ventures, Canopy board member John Powers (CEO of Stanford Management Co.) and Canopy’s three co-founders. Of that, GGV took the lion’s share with $27.5 million.

It’s time for them to give the money back.

As Deb reports below, over 1,000 people have had their Health Savings Accounts frozen because of the Canopy fraud. This mean sick people could be unable to access money saved for the purpose of paying medical bills. They may get the cash back eventually — via bankruptcy proceedings — but that’s cold comfort to someone who is ill or injured right now.

I’m told that one large healthcare administrator is making its clients good in the meantime, but it is an exception to to rule. Everyone else is just out of luck, and the FDIC doesn’t care because a failed bank isn’t involved.

A class action lawsuit has been filed in federal court in East St. Louis against Amcore Financial, a bank that allegedly held $17 million in Health Savings Accounts that were managed by Canopy Financial’s software.

The suit was filed on December 15, four days after peHUB reported that Canopy had sent a letter to account holders saying it had reason to believe that former executives were skimming money from the accounts.

The accounts — which are now frozen because of a dispute over how much should be in them — are a way for employers to let their employees set aside money for medical bills and get a tax break for doing so.

However, plaintiff Susan Patton claims that “several millions of dollars” of the money has been misappropriated and that she and the other account holders — over 1,000 people — have no access to what’s left.

(UPDATE: In a statement, Amcore says it is “not a custodian of any health savings accounts, and accordingly we believe claimant’s allegations are without merit. Amcore will vigorously defend itself against this claim.”)

Some people who have Health Savings Accounts administered by Canopy Financial’s software have had their accounts frozen because of a dispute over how much money is supposed to be in them, peHUB has learned.

Health Savings Accounts are a way for employers to let their employees set aside a certain amount of money each year for healthcare expenses and to get a tax break for doing so.

Yesterday, peHUB reported that Canopy had sent a letter to its customers saying it had reason to believe that its former executives were skimming money from the accounts. Canopy has not yet responded to our report. The company’s former president, Jeremy Blackburn, was indicted for wire fraud last week in Chicago federal court. Separately, Blackburn and Canopy were sued by the SEC.

We’re now told that the discrepancy between what the banks think should be in some of the accounts and what employees think should be there is substantial.

Thus far, the Canopy Financial story has been about how some company execs allegedly cooked the books to secure more than $60 million in new venture capital investment. But we’ve now learned that the scheming may have been far broader, and affected many more people than just Canopy’s investors and (mostly laid-off) employees.

In a letter sent yesterday to its customers, Canopy said that it has reason to believe that former executives were skimming from the Health Savings Accounts that Canopy’s technology is designed to help administer. In other words, they were stealing from ordinary folks employed by companies like Fifth Third Bank and Sovereign Bank (Canopy also claimed many clients outside the financial services space, but we’ve been unable to confirm their validity).

Canopy’s letter did not say how much money might have been taken, but we hear that it was well in excess of just a few hundred thousand dollars.

As Jeff Bussgang pointed out in his column today, the alleged fraud at VC-backed Canopy Financial is reminiscent of the fraud case at VC-backed Entellium last year. In that case, the former CEO and CFO were sent to prison in March for wire fraud and lying to investors (including Ignition Partners and Intel Captial) about their company’s actual revenue.

Former Entellium CEO Paul Johnston was sentenced to three years in prison and a little over $2 million in restitution, while former CFO Parrish Jones was sent away for two years and ordered to make restitution of more than $850,000.

Once they get out of prison, the pair also have to serve 80 hours of community service in a homeless shelter or soup kitchen.

Venture Capital Journal published a story last year after the Entellium case broke, questioning whether VCs could have done anything to prevent the fraud. Since it’s Friday, dear HUB readers, I’m making the story free today. Read it here.

Former Canopy Financial president Jeremy Blackburn has now been charged with wire fraud by federal authorities in Chicago, who claim that he allegedly diverted more than $2 million of a $60 million investment in Canopy last summer for “personal expenses and luxury items,” including an attempt to use a false bank statement to get a mortgage on a new home in Malibu.

Blackburn appeared in federal court in Chicago yesterday and is free on $1 million unsecured bond. A committee of outside directors that excludes the founders of Canopy is working with authorities on the case.

As part of the Series D round raised last summer from Spectrum Equity, Foundation Capital and another investor, Canopy agreed to provide audited financial statements and said that Blackburn and two other co-founders would sell up to 10 percent of their shares. Blackburn sold shares for $1.6 million, according to federal authorities, and Individual B, identified as Canopy’s chief technology officer, sold $975,000 worth of shares.Tony Banas, who held the CTO position at Canopy, has not been charged in the case.

An FBI affidavit (see below) also describes interactions between Canopy and KPMG, whose letterhead was allegedly used to provide a falsified audit to investors. KPMG never did audit Canopy’s financials, but it did provide a SAS 70 audit and had e-mailed a sample of an independent audit and other documents to Canopy’s chief administrative officer, who forwarded the documents to Individual B, the FBI said.

Former chief technology officer Tony Banas is not a defendant in this suit and remains on the board of directors, according to the SEC’s complaint, which was filed this week in federal court in Chicago.

Canopy and Jeremy Blackburn, Canopy’s former president and chief operating officer, are defendants, however, and are accused of engaging in a fraudulent scheme to raise $75 million from investors.

The complaint describes false financial statements and a false KPMG audit, along with false bank statements and inaccurate monthly operating reports.

Blackburn is also accused of misappropriating $1.17 million of investor funds for personal use. He allegedly sent the false KPMG audit and false financial statements to former CEO Vikram Kashyap, who has claimed to know nothing about the fraud, and asked Banas in e-mail messages to lie about the existence of the KPMG audit.