Richard D. Propper, MD and Daniel P. Beharry Reach Favorable Settlement of SBA Litigation

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Nov 05, 2010, 04:58 ET

SAN DIEGO, Nov. 5, 2010 /PRNewswire/ -- Richard D. Propper, MD and Daniel P. Beharry today announced the terms of the resolution of litigation brought against them by the SBA, as receiver for the Acorn Technology Fund.

Richard D. Propper, MD and Daniel P. Beharry recently settled litigation brought against them by the SBA and the DOJ on favorable terms that made clear they did nothing improper.

The facts are as follows:

The Acorn Technology Fund, LP, managed by John Torkelsen, received a license from the SBA in June 2000 to operate as a small business investment company.

About nine months earlier, Dr. Propper, Mr. Beharry and a group of their friends and acquaintances, were introduced to Mr. Torkelsen, who solicited their investment in Acorn. Since none of the people asked to invest in the fund knew Mr. Torkelsen personally, this group's investment was conditioned on Acorn obtaining its SBA license, which they expected would occur only after the SBA had carefully vetted Torkelsen and Acorn. This condition was clearly delineated in an addendum to the subscription agreement sent by Mr. Beharry to Mr. Torkelsen in January 2000. That addendum also clearly stated that if a capital call was made and an investor elected to opt out he could do so, but he would give up the right to make further investment. When the SBA licensed Acorn, the licensing condition was met, and the subscription to invest in Acorn took effect.

However, within a few months of issuing the license the SBA began to have concerns about Torkelsen's compliance with SBA regulations, and as a result, began auditing his activities. Yet even as its concerns about Mr. Torkelsen grew, eventually to the point that the SBA sued him to take over as receiver of Acorn, the SBA chose not to inform Acorn's investors.

Acorn made its final capital call in March 2003, at which point the market had soured, and many of the limited partners declined to meet it, as expressly permitted in the addendum to their subscription agreement. Mr. Torkelsen sanctioned this decision by explicitly writing a letter to the investors who had chosen not to meet the call to advise them that that their participation in the Fund was "capped," meaning they couldn't have invested further in Acorn even if they had wanted to do so. Each of them understandably concluded, therefore, that he had no further obligation to Acorn.

When the SBA finished its two-year investigation of Acorn, it instituted the receivership action, in which it alleged that Torkelsen had stolen over $8 million from the partnership. The SBA prevailed in that action, and Torkelsen pled guilty to several crimes. Under the plea agreement he received a 7-year federal jail sentence.

The SBA, in the wake of the embarrassment that it suffered at the hands of Torkelsen, needed to find a scapegoat to deflect criticism from itself for its mismanagement of Acorn. It chose to do so by making unfounded allegations, suggesting that somehow Propper and Beharry should have prevented Torkelsen's misconduct, even though the SBA itself had failed to do so. The SBA also persuaded the DOJ to prosecute a civil False Claims Act case against them, and it sought to collect the unfunded last capital call from all of the partners who had opted out of it.

After many years of discovery, the government failed to produce a single fact that supported their theories, leading them to approach Propper and Beharry to settle the matter. The government continued to press for settlement, even after Propper and Beharry on several occasions refused to discuss the possibility. Eventually the government offered such attractive terms (an amount less than the disputed final capital call alone) that settlement became the prudent course, since it also avoided the substantial cost in time and money of continuing to defend the other claims. However, the key element of the settlement that made it acceptable is that the government did not even seek, much less require, an admission of misconduct.

As Dr. Propper described it, "In the end, we accepted the settlement because it confirmed that there had been no wrongdoing on our part. Had the government not made the terms so attractive, we would have continued to pursue vindication in the courts, and there is no doubt that we would have succeeded. We were glad to put this behind us, especially because we could do so in a way that clearly demonstrated that we acted appropriately in all regards."