Denying the charges, Yida Gao’s lawyer calls them “false and racist.”
Denying the charges, Yida Gao’s lawyer calls them “false and racist.”
LOS ANGELES — Yida Gao, a venture capitalist allegedly linked to funding sources connected to the Chinese Communist party, lost his bid to dismiss a fraud lawsuit, when a U.S. District Court judge in Los Angeles ruled against him in August.
Judge Sherilyn Peace Garnett’s ruling clears the way for an explosive legal battle that has already raised questions about the Chinese government’s alleged theft of sensitive U.S. technologies. The lawsuit comes in the midst of a broader conversation on Chinese espionage in America, which spurred President Biden to issue an executive order last week blocking Chinese investment in certain technology in the U.S. and was the subject of a blockbuster joint FBI-MI5 press conference on July 6, 2022.
Adam Struck, the founder and CEO of Los Angeles-based venture capital firm Struck Capital Management, filed the initial complaint in the Central District of California in April, claiming that Gao—who served as a minority partner at Struck Capital’s cryptocurrency fund, Divergence Digital Currency, until his dismissal in 2021—swindled the company and stole proprietary materials to start a competing firm, Shima Capital.
The lawsuit alleges that, following his departure from Struck Capital, Gao joined a China-connected special purpose acquisition company— known in financial circles as a SPAC—that has numerous links to the Chinese Communist Party.
Gao’s legal team filed in June a motion to dismiss Struck’s lawsuit, arguing that the district court lacked jurisdiction over the case and that Struck failed to adequately plead his claims against Gao. He also asserted that, under a principle known as the Colorado River doctrine, the case be dismissed in deference to an ongoing state action.
Judge Sherilyn Peace Garnett rejected these arguments, denying Gao’s request to throw out the lawsuit.
“While the Court has allowed the case to move forward, its ruling does not in any way reflect on Mr. Struck’s claims—which have absolutely no merit,” said Cory Ross, a spokesperson for Gao. “It has given Mr. Gao another forum to assert his claims, which he has done in a counter-complaint filed earlier this month.”
“The allegations in this case—that as a minority partner at DDC [Struck’s fund], Mr. Gao repeatedly violated his fiduciary duties, used Mr. Struck’s name to make unauthorized deals, attempted to embezzle funds, and stole proprietary information to start his own, competing fund—have significant implications and deserve their day in court,” said Amnon Siegel, Struck’s attorney.
The decision to advance the case comes as Shima Capital continues to raise significant sums of money for its investment fund. In August, the firm announced in a press release that it had raised $200 million for its web3 ventures, a sum that includes contributions from high-profile investors such as Bill Ackman, Dragonfly Capital, Animoca, OKex, Mirana Ventures, Republic, and former presidential candidate Andrew Yang.
Shima Capital’s fundraising haul comes despite Struck’s allegations that, through another of his ventures, Gao may be contributing to the growing trend of mainland Chinese investors using Wall Street to gain access to U.S. technology and innovation. Gao is now the chief financial officer of Aurora Technology Acquisition Corp., a Cayman Islands-based SPAC that Struck’s lawsuit claims has courted investors with many links to the Chinese government.
“The allegations about SPAC, Chinese nationals, and the Chinese Communist Party are false, defamatory, racist, and the worst example of fearmongering,” said Ross.
The Chinese government may be using investment vehicles like SPACs to secure sensitive technologies and advance its interests, which raises national security concerns for the United States, according to numerous national security experts.
The FBI and MI5, Britain’s counterpart to the FBI, held a joint press conference in July to warn Western businesses about China’s efforts to steal intellectual property and trade secrets.
“The FBI-MI5 joint press conference raised awareness among businesses to the threat from China’s commercial espionage activities. Such a bold public announcement surprised companies in Europe and the U.S. who were often either ignorant or apathetic to the threat,” said Nicholas Eftimiades, retired senior intelligence officer and senior fellow at the Atlantic Council’s Scowcroft Center for Strategy and Security.
The Biden administration’s Sept. 15 executive order would strengthen the government’s ability to block Chinese investment in critical technologies. The order will direct the interagency Committee on Foreign Investment in the United States to take security factors into account when reviewing Chinese investments.
“Those factors include Beijing’s top priority technologies which have been the focus of their ‘whole of society’ espionage approach,” said Eftimiades.
Gao joined Struck’s blockchain fund, Divergence Digital Currency, in 2016. He was quickly made general partner before his relationship with Struck took a sharp turn.
In February 2021, according to Struck’s complaint, “Gao attempted to steal $150,000 from DDC by setting up a wire to himself.” The lawsuit claims that, despite earning millions in compensation while working for Struck’s fund, Gao’s “greed led him to make deals using Struck’s name and brand behind Struck’s back, embezzle funds and steal trade secrets on his way out the door in order to launch a competing fund.”
Gao’s spokesperson claims that these allegations have “no basis in fact.”
“Mr. Gao started Shima Capital using his experience, personal connections, and by putting together an excellent team of professionals,” said Ross. “This is why in its short existence, Shima has already by-far surpassed anything the DDC [Struck’s fund] was able to accomplish.”
In the month following his removal from Struck’s fund, Gao filed a lawsuit in Los Angeles County Superior Court, alleging wrongful termination. That case is still ongoing.
“On a personal level, Mr. Gao and Mr. Struck were once as close as brothers and it is revealing of Mr. Struck’s character that he would stoop to using such tactics in an attempt to get away with profiting from years of Mr. Gao’s hard work,” said Ross.
Gao’s lawyer called Struck’s allegations “false and racist.”
Meanwhile, Judge Sherilyn Peace Garnett has heard the arguments of Gao’s lawyers and ruled that the case should proceed.
(Additional reporting provided by Virginia Van Zandt)
