Big Backers Sue Prominent Startup -- WSJ
November 08 2017 - 3:02AM
Dow Jones News
By Rolfe Winkler
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (November 8, 2017).
Investors in Outcome Health on Tuesday sued the prominent
Chicago advertising startup and its two founders, claiming fraud
and breach of contract some eight months after investing nearly
$500 million in the company.
Funds managed by an investment unit of Goldman Sachs Group Inc.,
Google parent Alphabet Inc., and other firms alleged the company
and its founders, Rishi Shah and Shradha Agarwal, misled them by
knowingly providing false data and financial reports before the
firms invested $487.5 million beginning in March.
The investors say they are entitled to get their money back and
sought to freeze $225 million of the total that had been placed in
a separate account to pay the founders a dividend. "Plaintiffs now
hold securities that may be worthless," the complaint states.
The suit, filed in New York State Supreme Court in New York
County, cites a Wall Street Journal article from last month that
reported how some Outcome employees had misled pharmaceutical
customers about its advertising services. Outcome, which streams
advertising to video screens it places in doctors' offices, said
the funding round valued the company at $5.5 billion, making it one
of the most valuable U.S. startups.
"This is the latest negotiating ploy misusing the courts in the
interest of enriching Goldman Sachs at the expense of the company,
its employees and its customers as there is no merit to the
claims," Sanford Michelman of Michelman & Robinson, an attorney
representing Outcome, said in a written statement provided by an
Outcome spokesman. "These funds are earmarked for operations and
repaying lenders, yet these equity investors are improperly trying
to put themselves in front of the company's best interests."
The Journal article in October cited in the lawsuit reported
that Outcome charged some advertisers for ad placements on more
screens than the startup had installed, based on information
provided by former employees and advertisers as well as internal
documents and other material. Some Outcome employees also provided
inflated data to measure how well ads performed, created documents
that inaccurately verified that ads ran on certain doctors' screens
and manipulated third-party analyses showing the effectiveness of
the ads, according to some of these people and documents.
An Outcome spokesman, Lanny Davis, told the Journal last month
that Outcome had put three employees on paid leave and hired the
law firm of former U.S. attorney Dan Webb "to review allegations
about certain employees' conduct" that were raised internally and
by the Journal. Mr. Davis said Outcome "has always upheld the
highest ethical standards" and has adopted new policies to comply
with customer contracts.
Following the Journal's article, the investors pressed Mr. Shah
for access to company data to investigate the claims, according to
the lawsuit. The investors "discovered manipulations consistent
with those reported by The Wall Street Journal," the lawsuit
alleges. The founders "either knew of, or recklessly disregarded"
the misleading information, according to the suit.
As part of the funding round, funds run by Goldman's asset
management arm invested $100 million in client capital in Outcome.
Alphabet's CapitalG unit, Norwest Venture Partners and Emerson
Collective Investments, the investment arm of Laurene Powell Jobs,
each invested $50 million, according to the lawsuit.
Representatives for Goldman Sachs and Emerson declined to
comment. A representative for Google didn't immediately respond to
a request for comment.
Investors claim they have been unable to verify that the $225
million set aside for the founders remains in the subsidiary where
it was allocated. The lawsuit alleges that shortly after the
Journal's story, Mr. Shah, the CEO, took steps to move funds out of
the subsidiary. The investors want the funds frozen so they can be
used to pay any future judgments.
In a joint statement Tuesday, Mr. Shah and Mr. Agarwal said: "We
had the right to take out this money, and we did not. Instead, we
decided to make the funds available for the company's continued
growth towards its mission."
The $225 million pool of capital would be an unusually large
amount for startup founders to take out of their company. Most
founders don't cash out such large amounts until they sell their
companies or stage an initial public offering.
Any efforts by equity investors to recoup the money they put
into the company could be impeded by Outcome Health's creditors who
have lent the company around $300 million and are owed back their
money first.
Amplification An earlier version of this article contained
language implying that Outcome's founders had moved $225 million in
capital out of the company. In fact, the lawsuit by investors
alleges that founder Rishi Shah took steps to move the funds and
that their status is unclear. Mr. Shah says he didn't move the
funds.
Write to Rolfe Winkler at rolfe.winkler@wsj.com
(END) Dow Jones Newswires
November 08, 2017 02:47 ET (07:47 GMT)
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