The university faces accusations it used Stanford-StartX Fund to illegally pursue a profit-led investment strategy while using its own funds and personnel to protect the applicability of its tax exemptions as a nonprofit institution.

Stanford University and its board of trustees have been sued over claims it deceptively pursued a profit-led VC strategy from Stanford-StartX Fund using capital from its own tax-exempted bank account, AnalyticsInsight has reported.

Stanford-StartX Fund, which is operated by Stanford University’s affiliate StartX accelerator and backed by the institution, announced in January 2019 it would halt new investments from June 30 after six years in operation.

Stanford-StartX Fund’s closure was announced within a week of US-based virtual medical assistant developer MedWhat filing papers for the lawsuit, however the official reason given was that StartX had attained financial stability, enabling it to pursue a different funding model.

The lawsuit, which potentially has criminal implications, alleged Stanford engaged in tax fraud through the operation of Stanford-StartX Fund.

MedWhat insists Stanford-StartX Fund was falsely portrayed as an independent vehicle when in fact its capital and management came directly from Stanford University, allowing the institution to advance its own VC goals while retaining tax exemptions as a nonprofit organisation.

Specifically, the plaintiff will claim all 200 Stanford-StartX Fund investments came from the university’s own tax-exempt bank accounts, creating numerous conflicts-of-interest and misadvertised investment procedures that caused damages to MedWhat and its CEO.

Stanford University’s tax return declared it had not invested or participated in any joint venture or similar arrangement with a taxable entity.

Documents lodged by MedWhat purport to show Stanford’s trustees dealt illicitly with the fund.

MedWhat alleges Suzanne Fletcher, ostensibly the manager of the fund, was used as a front to allow Stanford University to make investments through Susan Weinstein, its assistant vice-president for business development, who is supposed to have reported to Randy Livingston, chief financial officer, and Sabrina Liang, director of school funds at the university’s endowment.

Stanford University has also been accused of tax-exemption infringements owed to co-investments with Stanford-StartX Fund made by university trustees, including Laurene Powell Jobs and Yerry Yang, through their own venture capital firms. These contributions may have also violated the university’s fiduciary duties and created additional conflicts of interest.

MedWhat, which is developing an AI-powered medical chatbot, raised $560,000 in a 2014 seed round featuring Stanford-StartX Fund, Stanford Hospital, Startcaps Ventures and assorted angel investors, before the vehicle returned to provide follow-on sums of undisclosed size in 2015 and 2017.

The company has been fighting the university and its other investors in the courts over the past year, having also accused them of using a convertible note issue to unfairly glean intelligence intended to support rival virtual medical assistant developer Sensely.