Harris Barton, a former right tackle with the San Francisco 49ers, remembers the time Reggie White of the Philadelphia Eagles flattened him. It was Sept. 24, 1989, and for two downs, he had fended off Mr. White's “rip-and-club” move of throwing opponents off balance and knocking them to the turf.
On third down, Mr. White hurled Mr. Barton on his butt and hit quarterback Joe Montana so hard he fumbled the ball. Mr. Montana went on to throw four touchdown passes in the fourth quarter to beat the Eagles, 38-28, on the way to the team's fourth Super Bowl victory.
There may be no such comeback for Mr. Barton in the investing game. HRJ Capital LLC, an investment firm he co-founded with another former 49er, Hall of Fame defensive back Ronnie Lott, collapsed in 2009 amid complaints by investors who said they were misled about the extent of its woes. The rise and fall of HRJ is a story of how former football champions traded on their star power only to be undone by a rookie mistake in the way they financed their investments.
“It worked for nine years, but mistakes were made,” Mr. Barton said as he sipped coffee at an Italian restaurant in Palo Alto, Cal. After HRJ's demise, he said, he was embarrassed every time he walked into a place like this in Silicon Valley. “I felt like everyone was looking at me and saying, "There he is, the dumb athlete who couldn't manage his firm.'”
Mr. Barton, an All-Pro who won Super Bowls in the 1988, 1989 and 1994 seasons with one of the most dominant dynasties to ever reign in football, set up the fund-of-funds firm in 1999. Woodside, Calif.-based HRJ, which Mr. Montana joined as a partner from 2003 to 2005, invested in venture capital, hedge funds and private equity funds.
Wrapped in the glory of their triumphs on the gridiron, the ex-49ers easily won entree to the most-prestigious names in finance — from venture-capital firm Kleiner Perkins Caufield & Byers and hedge fund Tudor Investment Corp. to buyout company Blackstone Group LP. George Roberts, co-founder of KKR & Co., became a mentor and golf partner of Mr. Barton's. Ken Griffin, CEO of Citadel LLC, invited Mr. Lott to make a speech to his Chicago hedge fund's greenhorn traders on what it takes to excel as a rookie.
“We used football to get in the door and talk to titans,” Mr. Barton said.
At its peak in May 2008, HRJ managed $2.4 billion from offices on three continents for sports stars such as Indianapolis Colts quarterback Peyton Manning and San Francisco Giants home-run king Barry Bonds, according to a roster of the firm's clients.
The Houston Firefighters' Relief and Retirement Fund, Cornell University's Office of University Investments and other institutions also took advantage of HRJ's access to elite money managers.
The firm threw parties to celebrate its success: In 2007, it flew many of its three dozen employees to London to schmooze with European clients at a luxury skybox at Wembley Stadium while the Miami Dolphins played the New York Giants on the field below.
The good times came to an end two years later because of the way HRJ financed its investments. Most funds of funds raise money from investors and then commit the capital to money managers. HRJ took a different approach: It made commitments to money managers prior to raising cash from new clients.
When those managers called for capital, HRJ paid primarily with debt issued by Silicon Valley Bank, a unit of SVB Financial Group, a Santa Clara, Calif.-based company with $15.7 billion in assets as of Sept. 30. For five years, HRJ paid down its debt with money from new investors in its funds. A spokeswoman for SVB declined to comment.
When credit dried up even for the highest-quality borrowers in 2008, HRJ was sitting on more than $338 million in unfunded pledges and was unable to raise cash to cover its bets. HRJ spiraled toward insolvency until its assets were acquired in 2009 by Capital Dynamics AG, a private equity fund-of-funds firm based in Zug, Switzerland.
“The strategy was unorthodox and unwise,” said Austin Long, co-founder of Alignment Capital Group LLC, an Austin, Texas-based private equity consulting firm. “If more funds had used this method, it would have brought the fund-of-funds industry to its knees.”
Investors were outraged upon discovering that HRJ had quietly transferred its overcommitment from an affiliate controlled by Mr. Barton and Mr. Lott to the funds of funds themselves, said Deirdre Nectow, head of business development at Cambridge Associates LLC, a Boston-based consulting firm that represented clients with more than $500 million invested in HRJ.
The move made HRJ's limited partners responsible for the debt to SVB and the capital calls issued by buyout firms. Ms. Nectow said in an interview that the shift violated the limited-partnership agreements HRJ signed with its clients that established the funds would remain debt free.
Cambridge only learned about the transfer after pressing Jeffrey Bloom, the firm's general counsel and chief compliance officer, for more details on the state of HRJ funds during the crisis.
“We were dismayed by the actions they took,” Ms. Nectow said. “They were not very forthcoming.” Messrs. Bloom and Barton declined to comment on the transfers. Messrs. Lott and Montana declined to comment for this article.
HRJ's financial maneuvers also triggered litigation from three senior executives: Lane Auten, a former investment banker with Banco Santander SA, who headed HRJ's marketing and fundraising efforts from 2003 to 2008, and Duran Curis and Darren Wong, both of whom managed HRJ's funds of funds and brought in new clients.
In a lawsuit filed in Santa Clara County Superior Court, the trio accused Mr. Barton, Mr. Lott, Capital Dynamics and SVB of stiffing them on more than $17 million in compensation.
The former executives said HRJ owes them portions of the management fees paid by clients in the firm's funds. When HRJ started running out of cash in 2008, the plaintiffs claim, the founders and SVB agreed to cut off those payments to them and instead use the fees to secure debt HRJ and its affiliates owed the bank, including $8 million in personal loans it made to Mr. Barton and Mr. Lott.
“These guys promised us, "You will be paid this money for all the work you do for 10 years,' but they overextended themselves and they broke that promise,” said Mr. Auten, 43, a managing partner at Impact Capital Partners, a San Francisco- based investment consulting firm. All of the defendants, who have denied the allegations in court filings, declined to comment.
Mr. Barton accepts responsibility for the fall of HRJ, a beating he said that ached far more than the blows he suffered on the football field.
“At the end of the day, my name was on the door, so I'll take the hit,” he said. After spending a year with Capital Dynamics, he opened H. Barton Asset Management, which will invest alongside venture capitalists in tech startups.
“I want to be back in the game,” Mr. Barton said. “I think I can make a go of it again.”