By Portland Business Journal

NuScale Power on Thursday said it is putting a halt to most of its operations after its primary investor was hit with a lawsuit by the Securities and Exchange Commission, putting its main funding source in jeopardy.

The news has suddenly turned a promising and seemingly well-capitalized Oregon energy startup into one in immediate need of new financing.

⿿This was a curve ball to us,⿝ said Bruce Landrey, a spokesman for the Corvallis-based company, which is developing modular reactors for nuclear power plants.

In a news release Thursday, NuScale said the SEC has filed a civil action against its primary investor, the Michael Kenwood Group LLC, which could prevent the firm from meeting its funding obligations to NuScale.

The SEC complaint centers on the activities of Francisco Illarramendi, the majority owner of the Stamford, Conn.-based Michael Kenwood Group.

The SEC claims Illarramendi misappropriated some $53 million from a pair of hedge funds controlled by the Kenwood Group into bank accounts he personally controlled and then made unauthorized investments in long-term private equity deals.

Founded in 2007 out of Oregon State University, privately held NuScale has raised $35 million in venture capital. It has identified the Michael Kenwood Group as its primary investor since early 2010.

Though NuScale isnâ¿¿t mentioned by name, the complaint said Illarramendi invested $23 million in an unnamed West Coast-based nuclear energy company that is due a $5 million cash infusion this month to cover operational expenses.

In its own news release, NuScale said Kenwood funds were expected to finance the company's operations at least through March.

⿿It is tragic that we have been forced to suspend operations and it is a tremendous setback for efforts to bring clean energy systems to the market,⿝ CEO Paul Lorenzini, a former president of Pacific Power, said in a news release.

NuScale is in the process of preparing its applications for design certification. The applications require significant work from outside engineers and designers, including safety analysis and system design.

All of that work has been put on hold, Landrey said.

The company is also evaluating whether there will be an impact on its staff of about 90, he said.

NuScale executives first heard of the inquiry Jan. 7 when officials were interviewed by the SEC about the level of the Kenwood Groupâ¿¿s investment. The company was notified about the SEC lawsuit by one of the Kenwood Groupâ¿¿s attorneys Friday night, the same day it was filed.

Now the company is on the hunt for investments from other sources, including strategic investors or venture capital firms, Landrey said.

Either way, the news seems to have blindsided the company.

⿿We had a credit facility with the Michael Kenwood folks and that was our principal source of funding. We had every anticipation that it would continue,⿝ Landrey said.

He said thereâ¿¿s always the chance that the court could release the funds.

⿿We quite simply don⿿t know,⿝ Landrey said. ⿿Because there is so much uncertainty, we thought the prudent thing was to take some precautionary steps until the picture is clear.⿝

Copyright 2011 American City Business Journals

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