(Reuters) – The University of California must try to obtain and then disclose closely guarded information on the investment performance of venture capital funds managed by Kleiner Perkins Caufield & Byers and Sequoia Capital, a state judge said in a tentative ruling made public on Tuesday.
The lawsuit, filed earlier this year in California state court in Oakland by Reuters America, a unit of Thomson Reuters Corp, argues that the state Public Records Act requires disclosure of specific investment-return information for the university system’s $10.65 billion endowment fund.
Reuters argued that the public had an interest in seeing details on the funds’ performance, and previous rulings have held that the university’s returns are public records. But the university argued that Kleiner and Sequoia considered the information confidential and that it receives only aggregate returns data from those two firms. Venture capital firms often strive to keep information about their performance secret.
The university has said the investment-performance information for the individual funds is not in the public record because it does not have the data. It says it only receives aggregate data on its holdings in multiple funds run by the two firms – a structure the lawsuit alleges is designed to avoid disclosure.
The university failed to show that the performance data for individual funds “does not relate to the conduct of the people’s business or that it does not have constructive possession of that information,” wrote Judge Evelio Grillo in his tentative ruling. Constructive possession means the right to control the records.
“Assuming that the Regents can obtain the fund level information, it is not exempt from disclosure,” he wrote. He directed the university to “make a good faith effort to obtain the information.”
On a separate issue concerning whether the university must disclose correspondence beyond the returns data, the court said it was tentatively ordering the university and Reuters to apply a framework to govern what documents should be disclosed.
He stayed the effect of his order and judgment through January 16, 2013, to permit the parties to appeal if they wish. Judge Grillo could still change portions of his ruling based on arguments made last week in court by both parties.
“We don’t believe it’s appropriate to comment until the judge issues his final ruling,” said a spokeswoman for the university. Representatives for Kleiner and Sequoia declined to comment.
The lawsuit illustrates the conflict between the desire of public investment funds to invest with top-tier venture firms and the desire of some of those firms to keep their performance secret.
California’s public-records law, which was amended after a 2003 lawsuit forced the University of California to disclose investment returns, shields some types of investment data from disclosure.
It explicitly states that other pieces of information, including the dollar amount of the commitment made, the net internal rate of return and the dollar amount of cash distributions received, are not exempt from disclosure.
The Reuters lawsuit, filed in January, stems from a request for individual fund details on the university’s investments in Kleiner and Sequoia Capital funds by Mark Boslet, senior editor at Thomson Reuters’ Venture Capital Journal and peHub, an online publication about private equity, buyouts and venture capital.
On its website, the university provides updated individual-fund level returns for all venture funds that date from before 2007 in its portfolio except a handful of funds. They are an Accel Partners fund the university has since provided information on; the Kleiner funds; and the Sequoia funds.
More recent funds’ returns are not considered meaningful, as venture capital can take several years to start showing returns.
Public records laws caused problems for venture-capital firms about a decade ago when many public groups started disclosing returns. Since then, many states have clarified their laws to detail exactly what must be disclosed, and most venture-capital firms have grown used to the possibility that their returns could become public. However, several top venture capital funds generally do not take investments from public groups they believe could disclose their returns, lawyers, consultants, investors and advisers say.
While even those top firms are not in a position to turn down all direct investments of public money, they can limit it to states and institutions with public-records laws and policies they consider favorable. For example, some public universities, such as the University of North Carolina and the University of Virginia, have separate, private foundations for their endowments that do not have to disclose returns.
The case in Superior Court in the State of California, County of Alameda, is Reuters v The Regents of the University of California, case no. RG12613664.
By Sarah McBride, Reuters
(Editing by Jonathan Weber and Eric Walsh)
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