Lawsuit Against Stanford University’s Endowment Stanford Management Company for Fraud

September 11, 2018 0 comments

Stanford

Medical artificial intelligence technology company MedWhat.com, Inc and its CEO Arturo Devesa, have filed a lawsuit for fraud in the Supreme Court of California in San Francisco on September 7th 2018 against their investor Stanford Management Company (SMC), Chief Executive Officer of SMC Robert Wallace, Director for Schools and Department Funds for SMC Sabrina Liang, Stanford University Chief Financial Officer Randy Livingston and Stanford University President Marc Tessier-Lavigne.

The Stanford Management Company is the company that manages and runs Stanford University’s $27 billion endowment. Investment returns generated from Stanford Endowment funds support the University’s mission. Annual payouts of about 5% of the value of the Endowment, or $1.2 billion in Fiscal Year 2017, represent more than a fifth of the University’s total operating revenue. Stanford Management Company manages University of Stanford’s financial and real estate investment assets. As a limited partner, Stanford Management Company is an endowment fund. The fund engages in the following alternative investments strategies: buyouts/corporate finance, distressed debt/turnarounds, energy/oil & gas, international private equity, timber/farmland, and venture capital. Stanford Management Company allocates 7 total assets to alternative investments.

Online records show Arturo Devesa was a research scholar at Stanford University Medical School from 2016-2017.

MedWhat claims it was misled into believing its investor was entrepreneur-friendly startup accelerator StartX via the Stanford-StartX Fund LLC (SSF) but instead it claims its investor was multi-billion dollar fund Stanford Management Company which runs a dishonest investment strategy with StartX siding with other Chinese venture capital firms who have defrauded MedWhat and as a result Stanford University and its endowment have destroyed MedWhat and damaged CEO Arturo Devesa’s reputation.

The lawsuit is part of an increasingly confrontational lawsuit between MedWhat, Stanford University and the Stanford Management Company through its financial vehicle Stanford-StartX Fund LLC. Lawsuits were filed in May by Stanford and June by MedWhat of 2018 with both sides accusing each other of fraud and Stanford asking back their investment in their convertible note, something MedWhat alleges has Stanford on record saying is not industry practice (venture capital industry).

MedWhat states that its investor Stanford-StartX Fund (SSF) is only a Limited Liability Company (LLC) shell company created by the Stanford Management Company on behalf of Stanford University. Typically, LLCs have no physical presence other than a mailing address, employ no one, don’t have an office, and produce little to no independent economic value.  The LLC is a hybrid form of business entity that can protect the owners effectively in the case of legal action.

Court documents show MedWhat and Mr. Arturo Devesa members of StartX since 2013 and StartX via Stanford-StartX Fund making investments in MedWhat in 2014, 2015, and 2017. StartX is the educational non-profit startup program and founder community created by Stanford University to help Stanford’s top entrepreneurs. Online records show StartX advertises itself as startup founder friendly, part of its mission helping entrepreneurs during difficult times, helping them grow their businesses, having entrepreneurs’ best interest and offering a trustworthy platform for entrepreneurs to share their ideas and companies.

MedWhat and Arturo Devesa’s lawsuit claims the opposite is true and states StartX and the Stanford-StartX Fund (SSF) are tools used by the Stanford Management Company and Stanford University to profit from Silicon Valley’s startups, have access and information on top new technologies being created by the Stanford community, all while hiding the name Stanford University and Stanford Management Company, hiding from entrepreneurs and the public the real tax structure motives behind the Stanford-StartX Fund LLC and the real investment strategy by Stanford Management Company that damages entrepreneurs and companies like MedWhat.

Online records from Crunchbase show Stanford-StartX Fund LLC is an investor in MedWhat’s direct competition Sensely and Bright.md. Both companies are virtual medical assistants and work with hospitals. Records show that another MedWhat investor, Beijing-based Chinese venture capital firm Magic Stone, is also an investor in MedWhat’s competition Sensely.

MedWhat claims that Stanford University and StartX lie and misrepresent when they advertise they have StartX’s and Stanford’s entrepreneurs’ best interest when making investments via the Stanford-StartX Fund. MedWhat also claims that it didn’t know StartX and Stanford University were making investments and helping its direct competition even though the StartX community is an open space where a lot of information is openly shared in a trustworthy environment encouraged by StartX. MedWhat claims Stanford Management Company and Stanford-StartX Fund LLC invests in many technology companies of the same vertical at the detriment of startups and doesn’t notify them of this conflict of interest when making an investment in them. MedWhat claims instead StartX is detrimental to the interests of a founder CEO to be successful.

How Trouble Starts

MedWhat claims that trouble started when one of its convertible note investors, Beijing-based Chinese venture capital firm Regent Capital, misled MedWhat into making a large Series A stock investment in 2017. MedWhat claims Regent Capital created a fake Series A due diligence and investment confirmation in order to have in depth access to MedWhat’s proprietary technology which was being developed at Stanford Hospital and transfer this technology and information back to China. MedWhat was developing a virtual medical assistant for Stanford Hospital by giving Stanford Hospital patients access to medical advice and pre-diagnosis 24/7, even at home and without any waiting time. Regent’s alleged investment fraud left Stanford-StartX Fund LLC temporarily owning more than 10% equity in MedWhat and putting in jeopardy Stanford Management Company tax structure and criteria of not being a lead investor in any startup in the SSF and own more than 10%. Michigan venture capital firm IncWell, which is another investor in MedWhat, is claimed from the lawsuit to have defrauded MedWhat with a fake partnership with the University of Michigan Hospital and Dr. Mark Cohen of UM in order to have access to MedWhat’s Stanford University Hospital technology. The lawsuit also claims IncWell and partners Reda Jaber and Simon Boag tried to steal an artificial intelligence software engineer of MedWhat, calling MedWhat’s bank account impersonating CEO Arturo Devesa to have access to the bank account balance, and spreading false rumors against Devesa to the rest of MedWhat investors about not having raised enough capital. However, even though despite Regent’s fallen through, records show MedWhat did raise sufficient capital from other investors for a total of $2.7million.

Lawsuit claims SMC and Stanford should be liable for fraud in how it treated MedWhat when the investment transaction between MedWhat and Regent fell through and put Stanford Management Company tax-exempt status potentially at risk. MedWhat claims that Stanford Management Company decided to side with IncWell and Regent and not believe Devesa without doing its own due diligence of facts. Stanford started a campaign to destroy MedWhat and run it out of business by sending demand letters and filing a lawsuit demanding money back form the convertible notes. Devesa claims before Stanford-StartX taking side, he told StartX manager Suzanne Fletcher about Regent’s fraud and to be very careful of IncWell. Instead, Stanford took the lead and the legal costs with law firm Alto Litigation on behalf of Regent, IncWell and Magic Stone and Stanford-StartX Fund in filing an alleged frivolous lawsuit against MedWhat, asking back convertible notes that had previously converted into equity and that Stanford-StartX Fund had already agreed to convert to equity.

It was during Stanford filing a lawsuit against MedWhat that Devesa says he found out that its investors Chinese Magic Stone and Stanford-StartX Fund were investors in MedWhat’s competition Sensely without having ever told Devesa.

MedWhat states that Stanford University and StartX wouldn’t help or give MedWhat time find replacement funding for Series A, instead acting opposite of StartX’s mission of helping entrepreneurs

Additionally, the lawsuit states StartX manager Suzanne Fletcher doesn’t run the Stanford-StartX Fund and has either no power or is unwilling to implement StartX founder friendly policies. Claims state Stanford Management Company and Stanford University are the entities that run the SSF like a venture capital firm and that their actions are not as wholesome as StartX advertises the fund to be. In order to hide Stanford University’s non-profit status and Stanford Management Company tax structure, both entities use the shell company SSF and non-profit StartX to make startups investment.

Documents retrieved show that investment instructions sent to MedWhat by Stanford University read as follows:

Documents should be prepared as follows:

 

Investment entity:

Stanford-StartX Fund, LLC

 

Signatory for the investment entity:

The Board of Trustees of the Leland Stanford Junior University

by Sabrina Liang, Director – School and Department Funds, Stanford Management Company

 

Contact information:

Stanford Management Company

Attn: Direct Investments

635 Knight Way

Stanford, CA 94305-7297

Ph#:  650-721-2302

Em:  direct@smc.stanford.edu

 

Lawsuit also claims that Stanford University and Stanford Management Company give their startup investments instructions on how to announce Stanford-StartX Fund investment that is not fully transparent and create conflicts of interest as described above:

•   Don’t use the names Stanford University, Stanford Hospital when announcing an investment

•   Always use the full Stanford-StartX Fund name in all communications.

•   Avoid stating or implying that a Stanford-StartX Fund investment is an endorsement of the company or its business plan.

•   Use the Fund’s legal name, Stanford-StartX Fund, in all communications. It should not be shortened to the Stanford Fund, the Stanford Hospital Fund or the StartX Fund.

•   “The Stanford-StartX Fund was created by StartX, Stanford University, and Stanford Hospital Clinics to help support the entrepreneurial endeavors of Stanford students, faculty, alumni and staff.”

Not use Stanford’s name and logo

MedWhat claims these instructions are given despite all signatures in investment documents are from Stanford Management Company employees and not a Stanford-StartX Fund LLC employee, the wire transfers come from a Stanford University bank account and not a Stanford-StartX Fund LLC bank account, the entity that keeps the MedWhat securities is Stanford Management Company and not SSF, and the legal beneficiary of profits from MedWhat future financial success is Stanford University and not SSF.

MedWhat claims that these conflicts of interest, fraud and misrepresentation, lack of transparency on what the fund really is, and who really runs the fund and makes its investment strategy, damaged MedWhat. MedWhat claims Stanford University took advantage of Devesa by making him believe it had a friendly investor in StartX, it was dealing with StartX, that StartX would help the founder in times of crisis and use its extensive resources to help MedWhat find a replacement from Regent investment fraud.

According to quotes from SMC CEO Robert Wallace by the Stanford Daily, “When [the SMC] finds opportunities … they’re often very capacity-constrained [and] very competitive,” Wallace said.  “If we just tell everybody in the world what we’re doing, then our competitive edge will erode.”

Wallace also clarified the legality of SMC’s offshore investment practices, emphasizing that Stanford has “a fiduciary obligation within the law to mitigate taxes, not evade taxes.”

“[The SMC does] not use offshore vehicles like the criminal world uses them,” he said. “When we use offshore vehicles, they are fully reported to the Internal Revenue Service … we’re not operating in an aggressive area in the tax code — it’s not a grey area.”

Court documents state that Stanford University filed a lawsuit against MedWhat claiming that MedWhat entire Series A was a lie perpetrated by Devesa and that only Stanford-StartX Fund was the investor in MedWhat’s Series A. Stanford University claims that Regent capital never wanted to invest in MedWhat’s Series A and that the other investor in MedWhat’s Series A, Massive Investment/Cibo Australia, either didn’t exist or never funded the investment.

Documents seen from MedWhat show proof that Massive Invesments/ Cibo Australia does exist and did fund the investment in MedWhat. Additionally, documents seen from MedWhat show an investment confirmation by Regent Capital sent to MedWhat before Stanford-StartX Fund made the investment.

MedWhat claims that both of its Chinese investors Regent and Magic Stone weren’t honest about their investments and in reality, invested in MedWhat to espionage its technology with a temporary convertible note they would recall in the future as they do in their lawsuit and defraud the company of its IP. MedWhat claims Stanford Management Company sided with Magic Stone and Regent Capital regardless of facts against MedWhat because of Stanford’s heavy business interests and entanglements with Chinese capital in its endowment and Stanford University’s history of tech transfer back to China, favoring Chinese venture capital firms.

MedWhat claims Stanford University allying with Beijing VC firms Magic Stone and Regent Capital against MedWhat stems from a larger recurrent theme of Stanford University doing business with China government and Chinese firms looking for access to American IP that don’t have the best interest of American technology companies at hand. MedWhat claims the University makes a lot of money from Chinese firms doing business with Stanford University and its endowment.

According to Crunchbase, a large number of Chinese investment firms are behind many StartX companies. Stanford-StartX Fund, Stanford University and the Stanford Management Company benefit from Chinese investment firms as they provided liquidity and easy access to capital to technology companies and help Stanford’s endowment grow. However, this cheap capital doesn’t come for free according to MedWhat and the price is a technology transfer and theft back to China without the startup’s knowledge that damages American competitiveness and advantage in innovation.

MedWhat uses as an example its American competitor, Sensely. Records at Crunchbase show Chengwei Capital is a Shanghai venture capital firm who’s the lead investor controlling Sensely, which is MedWhat’s direct competition. Chengwei, Stanford-StartX Fund, and Magic Stone are co-investors in Sensely, and have done business together in China. According to online records Sensely recently started selling its software in China. Under Chinese government’s “technology for markets” policy, which involves asking foreign companies to hand over their technology in return for access to China’s lucrative markets.

The United States government is involved in studying Chinese tech transfer through the Defense Innovation Unit Experimental (DIUx) and its recent report: China’s Technology Transfer Strategy: How Chinese Investments in Emerging Technology Enable A Strategic Competitor to Access the Crown Jewels of U.S. Innovation

According to the report, technology transfer to China occurs in part through increasing levels of investment and acquisitions of U.S. companies. China participated in ~16% of all venture deals in 2015 up from 6% average participation rate during 2010-2015.

Other ways of tech-transfer to China are 1) Academia, since 25% of U.S. STEM graduate students are Chinese foreign nationals 2) Technical expertise on how to do deals learned from U.S. firms.

The U.S. does not have a comprehensive policy or the tools to address this massive technology transfer to China. CFIUS is one of the only tools in place today to govern foreign 4 China’s Technology Transfer Strategy 2018 investments but it was not designed to protect sensitive technologies. CFIUS is only partially effective in protecting national security given its limited jurisdiction.

According to Forbes Magazine, Stanford University is a $27billion non-profit that has always prided itself in education, freedom, and doing the right thing. Forbes underlines not much of the original selflessness seems to have rubbed off on Stanford’s current crop of administrators. Quite the contrary, judging by the university’s rather mercenary dealings with the People’s Republic of China.

Stanford is the most prominent of more than ninety American universities that have been collaborating with the Chinese government’s controversial Confucius Institute program. Confucius Institutes are Beijing-funded schools of Chinese studies that are embedded within foreign universities. While these organizations’ ostensible aim is to promote mutual understanding between China and other nations, top scholars such as the Chicago-based anthropologist Marshall Sahlins and the prominent British China watcher Chris Hughes suggest that Beijing’s true motives may be rather less noble.

Contracts between universities and the Chinese Ministry of Education are typically secret (on the ministry’s insistence) but it is not in dispute that most participating universities cede control of their curriculums to Beijing. Not only do they allow Beijing to appoint many of the teachers but they implicitly accept a regimen of self-censorship in discussing “sensitive” issues such as the Tienanmen massacre.

https://www.forbes.com/sites/eamonnfingleton/2014/10/05/is-stanford-collaborating-with-chinas-espionage-program/

MedWhat claims in its lawsuit that Regent Capital and Magic Stone, with enablement of Stanford University and Stanford Management Company, transferred MedWhat’s technology to China and used part of MedWhat’s intellectual property to help its competition Sensely, which is a bigger company and doing well in China.

An example of Stanford University’s endowment growing from Chinese related businesses is Baidu. In 2011, Stanford University’s Graduate School of Business received a $150 million gift — one of the largest in the university’s history — to create an institute to alleviate poverty through entrepreneurship. The gift from Dorothy and Robert King of Menlo Park was inspired by 40 years of hosting international students in their home. The funding creates the Stanford Institute for Innovation in Developing Economies (SIID, but referred to as “SEED”). Robert King was an investment partner at Peninsula Capital in Menlo Park and a 1960 Stanford graduate business school alum. King provided the first investment for Baidu, the powerful Chinese-language search engine, which debuted on NASDAQ in 2005. Baidu now employs 10,000 people in China and is a powerful player in the country tech space. According to the Wall Street Journal, Baidu is controlled by Ministry of State Security in China. Hau Lee, a professor of operations, information and technology at the Graduate School of Business, was head of SEED.

https://www.paloaltoonline.com/news/2011/11/04/stanford-gets-150-million-gift

According to Wall Street Journal in 2017, Baidu Inc., are required to help China’s government hunt down criminal suspects and silence political dissent. Their technology is also being used to create cities wired for surveillance. Unlike American companies, which often resist U.S. government requests for information, Chinese ones talk openly about working with authorities. Baidu works closely with Ministry of State Security in China.

https://www.wsj.com/articles/chinas-tech-giants-have-a-second-job-helping-the-government-see-everything-1512056284

Baidu works closely with Stanford University Computer Science department and artificial intelligence Professor Andrew Ng. Stanford PhD students and professors worked on Baidu’s AI lab until recently.

Devesa claims that in the fall of 2016 with his Stanford email address started an email correspondence with Andrew Ng, the AI Stanford University Computer Science Professor who simultaneously was working for Baidu artificial intelligence lab. Ng still had an office at Stanford and Stanford email while developing AI for Baidu.  Baidu is China’s top technology company with direct ties to China’s Ministry State Security according to the Wall Street Journal. In 2014, Ng joined Baidu as Chief Scientist, and carried out research related to big data and A.I. Devesa’s intentions was to collaborate with Ng on AI at Stanford University through his research scholar position at the Stanford Medical School. Via email correspondence, Ng’s behavior and actions at all times was to ask many questions and gather as much information about MedWhat’s work with Stanford Hospital without any indication of collaboration or reciprocal intentions of working together. Even though Ng was still a fellow Stanford researcher, the correspondence was one sided and ended when Devesa saw conflicts of interests with Baidu.

Online information show University of Michigan is also part of the Chinese government’s controversial Confucius Institute program. Confucius Institutes are Beijing-funded schools of Chinese studies that are embedded within foreign universities.

IncWell orchestrated a partnership between MedWhat, UM and Dr. Cohen. MedWhat alledges Dr. Cohen had experience in tech transfer at this office:  https://innovation.medicine.umich.edu/poe-office-hours/

 

The Team of this Office are:

Tiefei Dong, MBA, PhD, University of Michigan

Assistant Director, Research Partnerships China, Office of Tech Transfer
Tiefei works with faculty and researchers primarily in the Medical School to protect and commercialize intellectual property developed at the University of Michigan.

Mark Cohen, MD, FACS University of Michigan

Director, Innovation & Entrepreneurship Path

Associate Professor of Surgery and Pharmacology

Associate Chair in Surgery for Innovation and Entrepreneurship

 

Finally, Joe Chao is a partner and investor of the IncWell fund. He has held various senior leadership positions at Chrysler, General Motors, and internal posts including first President and CEO of the Beijing Benz-DaimlerChrysler joint venture, and Global President and CEO of Chinese Automotive Company. Chao has experience in foreign companies in China under law to be forced to transferring technology to Chinese joint-venture partners. Chinese government makes carmakers give up sensitive technology in exchange for access to China’s market. Showing IncWell partners experience in tech transfers.

For more information on the lawsuit visit https://webapps.sftc.org and type Case Number: CGC18565596

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