Shima Capital founder controversy: suspected secret asset transfers trigger trust crisis

Original article by Leo Schwartz, Fortune Magazine

ต้นฉบับแปล: ลูฟี่, Foresight News

When Yida Gao returned to MIT in 2022, the former college pole vaulter and Phi Beta Kappa honoree faced a huge challenge. The prestigious university had invited him to teach the business school’s graduate courses on cryptocurrency and finance, a position previously held by Securities and Exchange Commission ChAIrman Gary Gensler.

Ten years after finishing his undergraduate studies at MIT, the Chinese immigrant landed on Forbes’ 30 Under 30 list and has since rocketed into the cryptocurrency space. Yida Gao owns his own blockchain-focused venture capital firm, Shima Capital. Gao has raised $200 million from financial giants like Bill Ackman and well-known cryptocurrency companies like Dragonfly and Galaxy, and has become one of the most active investors in the cryptocurrency space by participating in more than 300 investment deals.

Gao’s rise has been rapid, but his pace has not been steady. An investigation by Fortune magazine found that without the knowledge of Ackman and other investors, Gao created a secret offshore entity and transferred assets belonging to Shima Capital to a new บริษัท established in his own name. “This is a direct violation of the Investment Advisers Act,” said Eric Hess, a lawyer who focuses on digital assets and venture capital.

Gao has not been charged with any crimes, and a Shima Capital representative told Fortune that the firm does not comment on “regulatory matters of this nature.” But Gao’s poor performance and behavior appear to have violated the SEC’s investor protection rules, making it difficult for the one-time cryptocurrency star to raise more money, according to a source. Despite the booming market, a Shima representative told Fortune that the firm is not currently raising money.

Gao’s company has seen a number of high-level departures in recent months, including Chief Technology Officer Carl Hua and head of research Alexander Lin, who left Shima Capital earlier this year to start their own venture capital firm, and platform head Hazel Chen. The departing executives did not respond to requests for comment.

Despite the current bullish market conditions for cryptocurrencies, Shima appears to be struggling. The company’s most recent filing with the U.S. Securities and Exchange Commission (SEC) shows that it has approximately $158 million in assets under management, a figure that is lower than the $200 million Shima raised in 2022.

While corporate malfeasance may be as common as seized Lamborghinis in the cryptocurrency space, Gao has managed to convince an elite group of investors to back him and remain active in the space. His missteps will likely become fodder for critics of the crypto industry, which has long decried a host of shady practices.

“There are a lot of soft spots in the crypto space,” Hess said. “We need to start paying attention to them and not turn a blind eye to them, unless we are just the abandoned children of the financial system.”

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Gao, one of the latest crop of cryptocurrency wizards, follows a more traditional path: clean-shaven, fit, and with an impressive blue-chip institutional resume. He began his career in finance at Morgan Stanley, where he worked in mergers and acquisitions. In his spare time, he invests in startups, often working with well-connected entrepreneur Adam Struck. Gao worked at venture capital giant New Enterprise Associates and briefly attended Stanford Business School before dropping out to join Strucks venture capital firm in Santa Monica full-time.

While the partnership between Gao and Struck seemed to be blossoming in the public eye, by 2019, the relationship between the two had become strained behind the scenes. Struck filed a lawsuit alleging that Gao had secretly stolen proprietary information and founded a rival venture capital firm, Shima Capital, in Puerto Rico. Gao denied the allegations, arguing that Struck had “devalued” his contributions and refused to acknowledge their equal partnership, which led him to strike out on his own.

Struck has not yet responded to a request for comment on the legal dispute, which was settled in October 2023.

Although the settlement was kept under seal, Strucks attorneys accused Gao in court documents of setting up multiple shell companies, including a British Virgin Islands entity called ShimaB that Gao wholly owned.

Even as he feuded with Struck, Gao used his impressive resume and confident demeanor to convince and raise money from top figures in the cryptocurrency and financial world, such as Bill Ackman and former presidential candidate Andrew Yang. Shima began participating in deals in May 2021 and had invested about $100 million in about 200 projects by September 2022, according to an investment timeline seen by Fortune. Not everyone is impressed by Gaos boyish charm, however.

Several investors, potential backers, and potential portfolio companies told Fortune that Gao and his team were young and inexperienced and didn’t really understand what they were doing but were just jumping on the cryptocurrency bandwagon.

The downsides of betting on Gao soon became apparent. Notably, investors began to worry about how Gao’s firm valued its investments, and people familiar with the matter told Fortune that Gao would increase Shima’s stake based solely on his own ideas. A 2023 Financial Times article noted that this was an unorthodox approach. Gao responded by saying that Shima would soon hire professional fund administrators to oversee the accounting.

In another example of questionable accounting, in a document dated September 2022 and viewed by Fortune, Shima valued its investment in cryptocurrency exchange Chatex at $250,000, nearly a year after the U.S. Treasury sanctioned the company for facilitating illegal activity like ransomware and darknet markets.

As The Block reported in July 2023, despite Gao’s promise to find an auditor, Shima proved difficult to find, with two prominent accounting firms rejecting it because it fell outside their risk parameters.

An April 2024 filing with the U.S. Securities and Exchange Commission shows that a Cayman company called MHA Cayman became Shimas auditor, and a Shima representative confirmed that MHA completed Shimas 2023 audit in May 2024. MHA did not respond to Fortunes multiple requests for comment.

Unreliable strategy

In theory, Gao was selling investors a standard product. He took their money and invested in early-stage blockchain companies, providing exposure to the hot industry while also reaping the benefits of eye-popping growth.

Shima’s difficulty finding an auditor is not typical for a U.S. venture capital firm. It is also unusual that ShimaB’s offshore company is wholly owned by Gao. While many U.S. cryptocurrency venture capital firms have set up offshore entities to deal with the uncertain regulatory environment at home, those entities are owned by the company, not by the individuals who run it.

Gao did share a “fund structure” document with potential investors that outlined Shima’s network of limited liability companies that would hold investor capital and make investments, including several registered in the Cayman Islands.

But other internal documents reviewed by Fortune tell a different story. The ShimaB entity that Gao set up under his own name during his partnership with Struck does not appear at all in fund structuring documents or in the prospectus shared with investors.

Meanwhile, other internal documents on Shima’s shareholdings show that more than 100 investments were held by ShimaB, owned by Gao, from mid-2021 to the end of 2022, after Shima announced it was raising $200 million in funding.

While there is no evidence that Gao misappropriated assets through this operation, experts say such behavior is a serious violation of conflict of interest rules under the Investment Advisers Act, which clearly outlines the ethical obligations of venture capital firms to investors. In the ShimaB case, the law appears to prohibit Gao from using investors money to invest in entities he owns without making proper disclosures.

In addition to basic transparency, the reason is that if something happens to Gao, such as sudden death or bankruptcy, ownership of the investment could become disputed. It makes no sense, said Hess, a venture capital and blockchain lawyer. I dont think its a sound strategy.

คำเตือน

In late 2022, Shima’s investors began to see problems with the ownership structure and valuation discrepancies, leading them to alert Shima’s management. Galaxy redeemed its investment, and other smaller investors, including Bill Ackman’s family office and Dragonfly, largely stayed out of the dispute. That’s because their investments were relatively small, people familiar with the matter said.

In March 2023, Gao attempted to ease concerns by meeting with Shima’s small advisory board and disclosing that the firm had made “warehouse” investments using ShimaB (Note: “Warehouse” investments refer to investments made by fund managers through personally wholly owned entities before the venture capital fund’s investments are closed).

According to the minutes, Shima claimed it made investments using investor capital but had always intended to transfer it to the new company. In response to a series of questions from Fortune, a Shima representative reiterated that the company parked investments through “affiliated” entities such as ShimaB and transferred the investments to Shima’s new fund.

However, the minutes and the representative’s responses do not indicate that the company ever disclosed ShimaB’s arrangements to its investors, nor do they reflect that Gao transferred funds in his own name rather than through Shima. In addition, it is unclear whether Shima would have been able to transfer all of its investments back to the company due to transfer restrictions on many investments.

In addition to investor dissatisfaction, Shimas compliance issues could have legal implications for Gao and his company. Attorney Hess said that if Shima did not disclose suspicious operations during the review, this obvious conflict of interest violation could leave some handles for the U.S. Securities and Exchange Commission. He added that the range of enforcement penalties could include fines or even the revocation of Shimas investment advisory qualifications.

Despite his shady record, Shima continues to be active in investment activities. Investors have flocked to the cryptocurrency market, and memecoins like the popular Dogwifhat have begun to rise as the US regulatory battle is won. In April, Shima became an investor in the new blockchain of another dog-themed token, Shiba Inu.

Gao may not be an outlier in the cryptocurrency world. But for an industry trying to shake off its unruly reputation, his actions offer a cautionary tale for investors who want to avoid repeating past mistakes.

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