(Article from Registered Funds Regulatory Update, July 2025)
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On February 28, 2025, shareholders of Firsthand Technology Value Fund, a business development company, filed a class action lawsuit against, among others, the fund, its investment adviser and board of directors for valuation fraud and breach of fiduciary duties.
The Complaint alleges that from at least January 2021, the fund’s investment adviser, Firsthand Capital Management, Inc., under the board’s oversight, knowingly inflated the value of the fund’s investments while receiving management fees based on such values and concealed from investors that the fund’s portfolio was worthless due to its investments in failing companies.
According to the Complaint, Wrightspeed, an electric vehicle company, whose CEO was also the fund’s and Firsthand Capital’s CEO, received approximately $46 million in investments from the fund despite never generating any revenue in over a decade of operations. Similarly, IntraOp Medical, a radiation cancer therapy device manufacturer, received over $51 million in fund investments while reportedly facing significant financial difficulties. Over the fund’s life, approximately $30 million in management fees were paid to Firsthand Capital while the fund’s share price declined dramatically, ultimately resulting in nearly a complete loss for shareholders. The Complaint alleged that Firsthand Capital continued to calculate its management fee based on the fund’s inflated NAV, creating a conflict of interest that incentivized maintaining the artificial valuations. The Complaint further alleged that even as evidence mounted that these investments were failing, the fund knowingly issued false and materially misleading public statements and the board approved changes to the fund’s valuation methodologies to maintain the inflated valuations.
In November 2023, the fund finally acknowledged that its investments in Wrightspeed and IntraOp Medical were essentially worthless, writing down Wrightspeed’s and IntraOp Medical’s values to $0 and $168,000, respectively. As a result, the fund’s share price declined from $7.25/share in 2021 to $0.30/share in 2023. Thereafter, the board announced that the fund would liquidate. Plaintiffs claimed that basic due diligence would have revealed the true condition of these companies earlier, but instead Firsthand Capital inflated the investments’ asset valuations that the directors repeatedly approved.
In 2021, a concerned shareholder submitted a non-binding proposal for the board to “seek and pursue any and all measures to enhance shareholder value” including: (i) the fund’s termination; (ii) liquidation of fund assets with distribution of available cash to shareholders; (iii) tender offers for fund shares using available cash from any and all investment exits; (iv) merger of the fund into an entity offering shareholder exits near NAV; or (v) other measures likely to allow shareholders to exit the fund near its NAV. Firsthand and the board opposed the proposal stating it was not in the best interest of the fund and its shareholders. The board claimed that it was continuously evaluating opportunities to enhance shareholder value and the proposal was unnecessary, which was untrue based on internal board materials. In early 2021 and for 2022 and 2023 shareholder meetings, a shareholder submitted proposals to terminate the investment advisory and management agreements with Firsthand Capital but the board opposed these proposals, stating that removing Firsthand Capital “would likely severely impair the short-term and long-term value of the [fund’s] investment portfolio.” Moreover, Firsthand Capital and the board, through its approval, used illegal defensive mechanisms to avoid losing their positions and salaries by amending and restating the fund’s Bylaws to state that the Maryland Control Share Acquisition Act applied to any acquisition or proposed acquisition of shares, thereby barring any unaffiliated shareholder from voting more than 10% of the fund’s outstanding shares in order to limit their ability to influence the management of the fund. As a result, Plaintiffs asserted that these restrictions violated Section 18(i) of the 1940 Act, which provides that each share issued by a registered investment company must have “equal voting rights” with every other outstanding voting share. The board also carved out an exemption for the fund’s CEO, who also served as Firsthand Capital’s CEO, to permit him to continue to purchase, hold, and vote shares greater than 10%.
The Complaint seeks damages, the appointment of an independent receiver to value the fund and liquidate its remaining assets, an audit of profits realized by Defendants’ alleged misconduct, and attorney costs.
Complaint, Star Equity Fund, LP v. Firsthand Capital Management, Inc., et al., No. 1:25-CV-00677-SAG (D. Md. Feb. 28, 2025).