StrongRoomAI cofounder denies investor EVP’s claim that he admitted to fraud

Max Mito, the cofounder and CEO of StrongRoomAI, has denied he admitted to fraud in a meeting with investors last month that led VC EVP to call in police and launch legal action to freeze the assets of Mito and several others.

Mito’s counsel, Alexander Langshaw, told a Federal Court hearing in Sydney last Thursday morning that claims in an affidavit filed by EVP in which investor Misha Saul claims Mito replied “Yes” to a question about committing “wilful fraud” with faked revenue and customer numbers would be “strenuously resisted”.

Langshaw told Justice Scott Goodman EVP’s legal action sought to “perversely starve” his client with its freeze on Mito assets.

The VC fund successfully applied for an interim freeze on the company’s assets in late March, listing 13 defendants, including five directors – 2 of them cofounders – and the startup’s administrators and receivers, for up to $10.4 million each.

The Federal Court heard much of Mito’s wealth was tied to his share of StrongRoomAI, with just several thousand dollars in his bank accounts.

Mito has retained commercial law heavyweights Arnold Bloch Leibler as his legal representative, and Thursday’s case management hearing largely revolved around legal funding for the defendants.

The court allocated up to $80,000 for Mito’s legal fees, and $60,000 each for codefendants Christoper Durre, a cofounder, and Peter Bruce-Clark, a StrongRoom investor and director.

The court awarded StrongRoom AI’s voluntary administrators, HLB Mann Judd, up to $1.32 million in costs, professional fees and disbursements, as it looks to sell the business urgently, having received more than 10 bids to buy the failed startup as soon as this week.

After shedding more than 20 staff earlier this month, cutting the headcount in half,  HLB Mann Judd struck an agreement with EVP and the receiver, on a funding arrangement to meet the ongoing costs StrongRoom’s operations, and pay wages while plans for a sale continue.

Mito, 28, and other defendants have filed affidavits in response to the EVP allegations, including Durre and Bruce-Clark.

But his barrister, Alexander Langshaw, said the claimant, EVP, had still not delivered “any clear articulation of claims or a statement of claim” for Mito to defend.

EVP has until May 19 to file its Statement of Claim with the matter returning to court before Justice Goodman on May 27.

The VC fund from Sydney’s Eastern Suburbs led a $17 million Series A for StrongRoom in February, investing $10.4 million, around a quarter of EVP’s $41 million Opportunities Fund.

But less than a fortnight after the raise was announced publicly, EVP called in police and investor Misha Saul subsequently alleged that company’s revenue and debt figures were “wilful fraud”.

Within days, lender Paddington Street Finance called receivers to seize control of the banking assets, and StrongRoom’s board placed the business in voluntary administration hours later.

EVP then launched Federal Court legal action to freeze the assets of two cofounders and five StrongRoom directors.

EVP alleged it was “profoundly misled” with the cofounders engageing in “false, misleading or deceptive conduct” and “deliberate fraud” to secure the investment.

EVP claims seven-year-old medications management software startup’s cofounders told them the company was profitable when it was losing $800,000 a month, and also misled them on debt levels by more than $4 million.

An affidavit from Misha Saul from EVP outlined a conversation he had with Mito about the company’s revenue and financials where the cofounder allegedly admitted to booking loans and other funds as customer revenue, and conceded the revenue figures “may be inaccurate”, but Mito told Saul he “didn’t intend to mislead you”.

Saul alleges he said to Mito, on March 19, in the presence of fellow director and investor Rohan Gray, from Artesian Investments, that: “You faked the revenue and customer numbers across different product lines and just walked us through how much of each line is fake versus real. That is wilful fraud, isn’t it?”, and that Mito replied “Yes”.

Mito’s barrister told the court the allegation that he confessed to fraud was “hotly contested”.

StrongRoomAI had been valued at $70 million following its Series A raise.

NOW READ: What the StrongRoom AI saga reveals about venture investing, fraud, justice and due diligence