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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