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A leading venture capital firm ended its 22-year partnership with the University of California Wednesday, a move university officials fear could snowball, costing billions to the university endowment and employee pension funds. 

Sequoia Capital—UC’s most lucrative investment partner—dumped the university one month after a judge ordered UC to disclose classified financial data from its investments with venture capital firms.  

The school had been sued by the San Jose Mercury News and the Council of University Employees (CUE), which claimed that the financial arrangements should be a matter of public record. 

Alameda County Superior Court Judge James Richman sided with the plaintiffs in a July ruling which held that the public’s interest in obtaining the data outweighed the university’s interest in keeping them secret. 

Attorneys for the plaintiffs said UC was exaggerating the loss of Sequoia. 

“The University of California’s claims that they will lose valuable investment opportunities are not correct,” said Karl Olson of Levy, Ram & Olson, which represented CUE. 

At issue are internal rates of return (IRRs), statistics which are used to determine the value of investments in individual companies within a broad fund. Sequoia and UC insist these are trade secrets that competing companies could exploit if the information became public. 

In an Aug. 27 letter to UC Treasurer David Russ, Sequoia said it would stop doing business with the school because it feared that UC—a public institution that must keep its books open to scrutiny—could no longer keep trade secrets private. 

“Discretion and privacy are the handmaidens of successful venture capital firms. Our portfolio companies are hurt when sensitive information about their activities becomes available to competitors,” wrote Sequoia Managing Member Michael Moritz. 

The university invests in 11 Sequoia funds, amounting to about an eighth of the university’s total venture capital portfolio. Sequoia asked the university to immediately divest from all funds and barred UC from joining new funds. 

UC Treasurer David Russ wrote in court papers that other firms would likely follow Sequoia’s lead, excluding the university from “billions” in investment deals that fund academic programs and the university’s $35 billion retirement fund that pays benefits to more than 35,000 retirees. 

“This makes it harder for public universities to pay retirement benefits and fund programs,” said UC Spokesperson Trey Davis. “Stanford I’m sure would be more than happy to invest with Sequoia.” 

UC invests about one percent of its $53 billion portfolio in venture capital firms, which operate funds that pour money into fledgling companies hoping for big rewards if the companies prosper. That total has dropped by nearly two-thirds in the past two years as a result of the stock market collapse.  

Davis said that UC investments with Sequoia have returned about $508 million on an investment of $110 million, and that without such attractive investment options to generate income, the university would have to rethink its investment strategy and take fewer risks. 

The case hit the courts after UC denied the Mercury News’ IRR request last October. CUE, which represents university clerical workers, joined the newspaper on the grounds that without full disclosure business leaders on the UC Board of Regents could funnel public money into bad investments that benefit their partners in high finance. 

UC had argued that releasing IRRs would cost them lucrative investment opportunities and that it addressed privacy concerns by releasing performance data for the funds as a whole. To release IRRs, the university claimed, the Mercury News needed to show that they had reason to suspect that keeping the trade secrets private concealed fraud. 

Judge Richman’s July ruling held that the public’s interest in obtaining IRRs outweighed the university’s interest in keeping them secret. In his decision the judge noted Sequoia had accepted an $8 million investment from the University of Michigan even though the university had recently disclosed IRRs upon request. 

However, on the day of the decision, Sequoia alerted Michigan that it was canceling the investment due to privacy concerns. Two days later, venture capital firm Three Arch Partners broke off negotiations with UC. 

In light of these events, UC asked Judge Richman to reconsider, but on Thursday he let his decision stand. 

“The University of California’s claims that they will lose valuable investment opportunities are not correct,” said Karl Olson of Levy, Ram & Olson, which represented CUE. 

The university invests with roughly 70 venture capital firms, but Davis said that when given the choice between taking money from UC or a private investor that could guarantee privacy, top-tier funds that generate the highest returns would exclude the university. 

The judge’s ruling will not affect individual employee pensions. UC is still required to pay the same benefits, but may have to reallocate money from other programs to cover the loss. 

Davis said the university will appeal Richman’s ruling to the First District Court of Appeals, but doubted that the university would challenge Sequoia’s decision to drop UC for fear that it would antagonize other venture capital firms. 

“We’re evaluating the legal details of the (venture capital) agreement, but we want to remain an attractive partner to other funds,” he said.