Government sues for control of SmartForest Ventures

The U.S. Small Business Administration is suing for control of Smart Forest Ventures I LP after investing more than $33 million in the Portland-based venture fund.

The suit, filed Jan. 5 in U.S. District Court for Oregon, asks the court to appoint the SBA as receiver for SmartForest, which it said has violated the terms of its agreement with the government.

The suit asks the court to prevent SmartForest managers or agents from spending funds or encumbering the firm in any way.

Hugh Mackworth, managing partner for SmartForest, could not be reached.

Formed in 2000, SmartForest invests a mix of private and government-backed funds in high-tech startups.

The SBA licensed SmartForest as a Small Business Investment Company on Jan. 19, 2001.

The fund raised $25 million in private capital, much of it from local investors. It used that money to leverage an additional $29 million in SBA-backed funds. The SBA advanced another $4.5 million, bringing its total commitment to about $33.5 million.

According to the suit, $28.7 million is outstanding.

The SBA claims that SmartForest failed to maintain appropriate capital impairment levels. Its agreement limits capital impairment levels to 60 percent. As of Sept. 30 2009, SmartForest’s capital impairment percentage had increased to 94 percent.

The SBA first determined SmartForest had a capital problem in 2006 and imposed restrictions on the company in September of that year.

In December 2006, it notified SmartForest it intended to liquidate the investment.

Last spring, Mackworth, co-founder Debi Coleman and partner Thomas Toy, told investors the management team would forego salaries until SmartForest resolved its issues with the government and said it had agreed to reduce management fees to less than 0.6 percent of the fund’s assets until the government was repaid.

The team also said it was seeking a private investor to take over the government’s position in the company.

SmartForest’s Portland-area holdings include Kryptiq Corp., Attensa Inc., Concero Technology, iMove Inc., NexPlanar Corp. and Phoseon Technology Inc.