By Rolfe Winkler 

Federal prosecutors filed criminal charges against former executives of once-highflying startup Outcome Health, alleging they falsely reported data to defraud the company's clients as well as investors -- including Goldman Sachs Group Inc., Alphabet Inc. and an investment firm then headed by Illinois governor J.B. Pritzker -- to obtain almost $1 billion in debt and equity financing.

The indictments of the company's former chief executive, Rishi Shah, as well as ex-president Shradha Agarwal and previous finance chief Brad Purdy, conclude a two-year investigation by the Justice Department. The case was sparked by a 2017 Wall Street Journal report that the company had misled some customers with inflated data and fake reports.

In the indictment unsealed Monday, the three executives were each charged with multiple counts of mail and wire fraud and one count of bank fraud. Mr. Shah, 33 years old, also faces two counts of money laundering and Mr. Purdy, 30, one count of making a false statement to a bank. On the most serious charges, the three each face a maximum prison sentence of 30 years if convicted.

The Securities and Exchange Commission on Monday also sued the three former executives, alleging they committed civil securities fraud.

The SEC's lawsuit seeks a court order demanding Mr. Shah and Ms. Agarwal return any proceeds illegally raised from investors. It also seeks civil fines against all four defendants. The lawsuit additionally asks the court to bar Messrs. Shah and Purdy and Ms. Agarwal from serving as an officer or director of a public company.

A lawyer for Mr. Shah said his client denies the charges brought by the Justice Department and SEC and "looks forward to his day in court and the opportunity to clear his name."

Ms. Agarwal's attorney said her client denies federal prosecutors' allegations. "Shradha never committed fraud and never participated in any conspiracy. To the contrary, Shradha was committed to transparency and integrity at Outcome Health. She will fight to protect her good name in court."

A lawyer for Mr. Purdy, didn't immediately respond to a request for comment.

According to the indictment, the executives lied to Outcome's pharmaceutical company clients, falsely inflated data, caused the company to charge for more ads than it could deliver and inflated revenue figures, which it used to raise nearly $1 billion in debt and equity financing.

The charges against Outcome's former executives represent the latest enforcement effort aimed at technology startups that appear to have adopted a culture of 'fake it til you make it.' Last year, federal prosecutors filed fraud charges against the former executives of blood-testing company Theranos Inc. after a series of Journal articles raised questions about its technology and practices. A federal trial in that case is scheduled for August 2020.

Outcome Health, founded in 2006, hoped to dominate the business of advertising in doctors' offices by installing flat screens to stream pharmaceutical ads. The company estimated 2016 sales of about $130 million, up substantially from $7 million four years prior.

By early 2017 it had acquired a top rival, leased a large downtown Chicago office building and raised nearly $500 million of capital -- at a valuation the company said exceeded $5 billion -- from well-known investors including Goldman Sachs, Alphabet's CapitalG investing unit and firms led by Mr. Pritzker and Laurene Powell Jobs, Steve Jobs's widow. It had previously raised $485 million of debt financing.

Mr. Shah became a star on the Chicago startup scene and in Democratic politics as he showered politicians with hundreds of thousands of dollars in donations, according to the Center for Responsive Politics. Sens. Chuck Schumer (N.Y.) and Elizabeth Warren (Mass.), who is currently running for president, came to his Chicago office for meetings in 2017.

Mr. Shah was particularly close to Mr. Pritzker, also a Democrat. The two knew each other through a business leadership group, according to people familiar with the group, before Mr. Pritzker's firm invested $50 million in Outcome.

Gov. Pritzker's office didn't immediately respond to a request for comment.

The Journal revealed in an article in October 2017 that the company had grown in part by charging pharmaceutical companies for ads on more screens than it had installed, according to interviews with former employees and advertisers, and a review of internal documents. Outcome also provided inflated data for how well ads performed and manipulated third-party analyses showing the effectiveness of its ads, according to these people and documents.

A month after the Journal's story, Outcome investors sued the company, alleging they had been defrauded. Mr. Shah and Ms. Agarwal denied wrongdoing. They later resigned from their positions and settled, agreeing to give back most of the $225 million dividend that they had negotiated for themselves as part of the investment round raised just months earlier.

Another former Outcome executive, Ashik Desai, was indicted on one count of wire fraud. The Justice Department released the charge on Nov. 14, when it also charged two of Mr. Desai's former staffers with conspiracy to commit wire fraud. People familiar with the case said the three are expected to plead guilty and cooperate in the government's case against Messrs. Shah and Purdy and Ms. Agarwal.

After the Journal's article, Mr. Desai, 26, left Outcome and enrolled in the University of Pennsylvania's Wharton School of Business, where he received honors his first year. Mr. Desai faces a maximum prison sentence of 20 years and his two staffers maximum sentences of five years each if convicted.

Mr. Desai joined the business in 2012 as an intern and quickly rose to become an executive vice president in charge of Outcome's data analysts. The SEC said he manipulated results of tests designed to measure the effectiveness of Outcome's ads.

--Dave Michaels contributed to this article.

Write to Rolfe Winkler at rolfe.winkler@wsj.com

 

(END) Dow Jones Newswires

November 25, 2019 14:56 ET (19:56 GMT)

Copyright (c) 2019 Dow Jones & Company, Inc.
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