Big investors are starting to take a deeper look at the people who handle their money as the #MeToo movement rages. One of Silicon Valley's top wealth-management firms just showed what can happen next.
Iconiq Capital, known for catering to Silicon Valley royalty including Sheryl Sandberg and Mark Zuckerberg, fired its head of real estate, John Sauter, in February after a background check by a potential investor unearthed a charge for sexually assaulting a woman almost three decades ago, according to people familiar with the matter. The court handling the case had ordered it expunged, but Iconiq executives worried keeping him would hurt relations with clients, one of the people said.
The situation spotlights a brewing dilemma for the financial industry. Investors are being urged to conduct more rigorous background checks on money managers, potentially looking back decades further than employers themselves can. People close to Mr. Sauter say he contends his termination broke laws in California that block employers from considering old, expunged cases.
"More of these situations are going to happen as allocators dig deeper and ask more questions," said Andrew Borowiec, executive director of the Investment Management Due Diligence Association, which advises big investors. That's going to force investment firms into tough decisions.
"It's so new and there are so many variables involved that it's hard to really nail down what you do in a situation like this," Mr. Borowiec said.
Mr. Sauter, 52, declined to comment, as did Iconiq, citing a policy of not publicly discussing personnel matters.
Culture of Secrecy
Over the past year, banks and wealth managers have gone largely unscathed as the #MeToo movement swept through Hollywood, politics, tech firms and the media, exposing powerful men for mistreating women. That's partially because of the financial industry's culture of secrecy, embodied in employment agreements that prevent complaints from becoming public.
And for years, big investing clients have shied away from tough questions about sexual misconduct. This month, Mr. Borowiec's organization published a survey of institutional investors — including endowments, pension managers, private banks and insurers — that showed almost 90% hadn't specifically inquired about sexual harassment when allocating money.
The association is now urging investors to conduct more rigorous background checks. As they do, "there are going to be more indiscretions coming to light," Mr. Borowiec said.
(More: Sen. Warren seeks data showing depth of sexual harassment on Wall Street)
Sauter's Plea
Mr. Sauter's situation raises questions about what should happen once incidents surface from decades back. California and San Francisco, where Iconiq is based, have enacted measures in recent years limiting what information companies may consider when screening their staff. The idea is to let people resolve criminal charges and eventually find productive work. No other such cases could be found during Mr. Sauter's career.
In 1991, he was charged in California for crimes alleged to have occurred the previous year, when he was 24. Authorities accused him of sexually assaulting a woman, penetrating her with a foreign object and forcing oral sex, according to court documents.
Mr. Sauter pleaded to a single count of sexual battery. He didn't admit wrongdoing, one of the people said. Court documents show he received a nine-month suspended sentence with five years of probation. In 1996, a not guilty plea was entered and the conviction set aside.
Yet records of the case remained available to the public because of a bureaucratic quirk: Mr. Sauter moved from Orange County, where the charge was originally brought, to Los Angeles County, causing some documents to be filed there, too. The dismissal removed his conviction from public view at one courthouse, but it could still be found at the second.
The case surfaced while an Iconiq joint venture sought to raise money from institutional clients for a fund focusing on investments in data centers. A potential client notified the firm that it had discovered a problem in Mr. Sauter's past, said the people, who asked not to be identified because of the matter's sensitive nature.
The investor flagged the conviction to Iconiq in early December, the people said. The company discussed the issue with him in late January and fired him in mid-February, one of the people said.
Mr. Sauter, that person said, contends his dismissal violated laws restricting what employers can ask applicants about arrest records that have been expunged. California also prevents employers from looking back more than seven years when conducting background checks.
The firing has left him scouting real estate deals for his own venture, Blue Orchid Group.
Iconiq's Ambitions
Mr. Sauter, a Duke University graduate, had gone on with his life after the incident. He completed an MBA at the University of California Los Angeles, and according to people who know him, got married and had three children. Over the years, he built a successful career in real estate, including stints at Michael Dell's family office and CBRE Global Investors, where he was responsible for originating, underwriting and structuring deals on the West Coast. He oversaw purchases of the Sofitel San Francisco Bay and the Irvine Marriott hotels, according to statements.
He landed at Iconiq in 2016, when the firm was just five years old but already well known in the financial and technology worlds for its roster of high-profile clients. Most of its founders had worked at Morgan Stanley and Goldman Sachs Group Inc., setting out to parlay their Silicon Valley connections into their own money manager. The firm has since expanded to offer merchant-banking and other services.
Iconiq, established in 2011 by Divesh Makan, Chad Boeding, Michael Anders and Will Griffith, is best known for managing the money of Facebook Inc. co-founder Mr. Zuckerberg, an early and longtime client. It's also counted Ms. Sandberg, the social network's operating chief, as another marquee client. She's devoted herself through writing and speeches to the advancement of women.
(More: Iconiq Capital co-founder leaves to start rival wealth-management firm)
