US Banker  |  December, 2009

By Glen Fest

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Canopy Financial, a fast-rising financial technology vendor in the health savings account area, may be on an equally swift descent following criminal allegations of investor fraud.

Last week, the Securities and Exchange Commission filed a civil lawsuit against the Chicago-based company and co-founder Jeremy Blackburn (who also faces criminal charges), alleging the 36-year-old president and COO of Canopy and the firm had falsified financial statements to investors that had pumped more than $75 million into the company.

The SEC actions occurred after a tumultuous two weeks in which Web tech-news site TechCrunch first broke the news that several venture capital firms, as well as Canopy’s investment bank — Financial Technology Partners – had pulled Canopy from their portfolio pages, amid rumors that Canopy had falsified an audited statement with KPMG letterhead. Canopy filed for bankruptcy protection Nov. 24 and announced it had laid off 92 of 123 workers.

CEO Vikram Kashyap resigned his post, but remained as board chair, releasing a statement in which he denied any knowledge of wrongdoing at Canopy.  Also, chief technology officer Anthony Banas had been placed on administrative leave.

The SEC allegations in the civil lawsuit in a Northern Illinois federal court claim that Canopy (which has offices in Silicon Valley and New Jersey) and Blackburn had induced investors between October 2008 and August 2009 to purchase preferred placement shares after giving them with false financial documents “misrepresenting…Canopy’s financial condition.”  Blackburn received about $1.6 million after redeeming 250,000 shares in the sale, while also misappropriating “at least” $1.17 million into his personal bank accounts, according to the SEC’s suit. The false documents included 2007 and 2008 financial statements from KPMG, and a fake bank statement that claimed the company had $8.9 million on hand — “when in fact it was a custodial account of a Canopy client that held approximately $86,952.”

The complaints came to light, according to the SEC, when KPMG learned of the alleged doctored audits. “In fact, KPMG had never been retained by Canopy to audit its financial statements and had never opined on the financial condition of the company,” according to the SEC.

The criminal investigation also involves the U.S. Attorney for the Northern District of Illinois and the FBI.

Canopy Financial has been one of the most visible companies in the banking services segment over the past two years (No.12 on Inc. 500 list in November 2009, and Kashyap named one of Bank Technology News’ top innovators for 2008).  The company boasted it’s Web-based HealthDirect platform for managing health savings and reimbursement accounts had landed at several top banks – including Wachovia, Fifth Third Bancorp and Comerica. It also had a partnership with Wolters Kluwer Financial Services to have Canopy’s technology serve as the underlying platform for Wolters’ widely used HSA Director system.

Even if its finances were a mirage, its technology wasn’t, said analysts who have covered the space. Red Gillen, a senior analyst at Celent, said the company had the most “innovated” feature sets available including a health-plan management function that came from its 2008 acquisition of Caregain from Fiserv.

Gillen said, however, Canopy’s problems will “no doubt” prove disruptive to its banking and insurance clients, some of whom he said have been contacting other HSA platform providers such as FIS/Metavante for a quick-turn replacement of their platforms. “We are at the peak of (or even beyond) the health plan/HSA enrollment season, which means that Canopy’s customers are going to have to find a way to port a large number of customer accounts to another system in a hurry,” he stated in an e-mail. “In other words, this couldn’t have happened at a worse time.”