A crypto wunderkind’s $200 million fund had the backing of investors like Bill Ackman and Galaxy. Then everything went south

Hi, Leo Schwartz here filling in for Allie.

Stop me if you’ve heard this story before. A crypto boy wonder rises through the ranks of blue-chip institutions, with credentials from MIT, Morgan Stanley, and the Forbes 30 under 30 list. He gains the trust and support of leading investors in finance and crypto, from Bill Ackman to the Galaxy firm. But just under the surface, trouble—and serious legal ramifications—loom.

No, this is not Sam Bankman-Fried, or Do Kwon, or Kyle Davies and Su Zhu, although I acknowledge this beat is starting to sound like a broken record. Instead, I have a new investigation on Yida Gao, who just a couple of years ago was a rising star in blockchain. His firm, Shima Capital, raised $200 million in its debut fund, backed by some of the industry’s biggest names. Gao quickly became one of the most active investors in the space and even taught a course on crypto at MIT’s business school, filling a position vacated by SEC Chair Gary Gensler.

Behind the scenes, however, Gao appears to have cut some crucial corners while operating his fund, alienating his investors and possibly running afoul of key SEC rules. In the most glaring example, Fortune’s investigation revealed that Gao funneled investments into a secret offshore entity he wholly owned without disclosing the arrangement to investors—a potential breach of the Investment Advisers Act, according to experts I spoke with. “It doesn’t make any sense,” Eric Hess, a venture and blockchain lawyer, told me. “I don’t think that’s a defensible strategy.”

Gao doesn’t only have the SEC to worry about. Shima has also alienated backers, with the crypto firm Galaxy redeeming its investment and others raising alarm bells. According to one source, Shima struggled to raise further capital due to concerns over its performance and behavior, and a representative confirmed the firm is not currently fundraising, despite the red-hot crypto market.

It shouldn’t be a surprise that compliance is still a struggle for crypto firms. The industry still lacks clear regulation in the U.S., and most mainstream venture funds who want to participate in blockchain deals have to set up a web of offshore entities. But that shouldn’t mean flouting the law or basic investor protection principles.

While there is no evidence that Gao and Shima set out to misappropriate funds, their actions are at best careless, and at worst could result in severe legal penalties. It’s a tale all too common in the crypto industry, which seems to replicate the same missteps every cycle.

“There’s a lot of softness around the edges, sometimes a lot of ‘Trust me, bro,’” Hess told me. “We need to start paying attention to these standards and not pretending unless we’re just the derelict children of the financial system.”

You can read the full story here.  

Leo Schwartz
Twitter: @leomschwartz
Email: leo.schwartz@fortune.com
Submit a deal for the Term Sheet newsletter here.

Joe Abrams curated the deals section of today's newsletter.

This story was originally featured on Fortune.com