Outcome Health co-founders, former executives charged in alleged $1B fraud scheme

The founders of healthcare technology startup Outcome Health were charged with fraud in a 26-count federal indictment unsealed Monday.

Four former executives and employees also were charged for their alleged roles in a $1 billion fraud scheme that targeted the company’s clients, lenders and investors, according to a press release from the Department of Justice (DOJ).

The charges come just a few weeks after the Chicago-based digital advertising company agreed to pay $70 million to resolve a criminal fraud investigation in Illinois.

Rishi Shah, 33, of Chicago, co-founder and CEO of Outcome Health, and Shradha Agarwal, 34, of Chicago, president of Outcome Health and branded as a co-founder, were charged in a superseding 26-count indictment (PDF) filed in the Northern District of Illinois and unsealed today, the DOJ said.

Also charged in that indictment were Brad Purdy, 30, of San Francisco, chief operating officer and chief financial officer, and Ashik Desai, 26, of Philadelphia, executive vice president of business operations and, more recently, chief growth officer of Outcome.

    The DOJ also announced that Kathryn Choi, 29, of New York City, a senior analyst and Oliver Han, 29, of Chicago, an analyst were charged in an information (PDF) for their roles in the alleged fraud.

    Outcome, formerly called ContextMedia, was one of Chicago’s high-flying startups, pulling in $500 million during its first round of funding in May 2017 and attracting high-profile investors like Goldman Sachs and Google’s parent company, Alphabet. The company was valued at $5.5 billion at the time.

    The company installs TVs and tablets in physicians' offices and sells targeted ads to pharmaceutical companies.

    An initial appearance and arraignment for Shah, Agarwal and Purdy in federal court in Chicago have not yet been scheduled. An initial appearance and arraignment for Desai are set for Dec. 3 before U.S. District Judge Thomas M. Durkin. An initial appearance and arraignment for Choi and Han are set for Dec. 5 before U.S. Magistrate Judge Jeffrey Gilbert, the DOJ said.

    RELATED: Outcome Health to pay $70M to resolve federal fraud investigation

    As part of its settlement with the DOJ, Outcome admitted that from 2012 to 2017 former executives and employees of the company fraudulently sold ads to clients. Federal investigators said Outcome overbilled clients by more than $6 million in 2015 and by more than $25 million in 2016, according to the non-prosecution agreement (PDF).

    Outcome's troubles started in 2017 when The Wall Street Journal reported that the company inflated data to pharmaceutical companies to boost ad sales. Things continued to unravel when the company was sued by investors who wanted to get their nearly $500 million investment back, claiming the company provided investors with fraudulent data and financial reports.

    The investors ultimately dropped the suit and reached an agreement with the founders—Shah and Agarwal—in which they reinvested money in the company. Shah and Agarwal stepped down from their positions and day-to-day management.

    “The defendants were charged with allegedly over-inflating the company’s revenue figures in order to fraudulently obtain loans from banks,” Inspector General Jay N. Lerner of the Federal Deposit Insurance Corporation’s Office of Inspector General said in a statement Monday.

    “This scheme was orchestrated by former leaders of the organization who personally benefited from hundreds of millions of dollars. We are committed to working with our law enforcement partners to investigate individuals involved in the crime and to preserve the integrity of the banking system," Lerner said.

    Federal investigators allege that from 2011 to 2017, the former executives and employees of Outcome sold tens of millions of dollars of advertising inventory that did not exist. This allegedly resulted in inflated financial statements that the former executives used to raise nearly $1 billion in debt and equity financing in 2016 and 2017. 

    Shah, Agarwal and Purdy are each charged with various counts of mail fraud, wire fraud and bank fraud. Purdy is also charged with one count of false statements to a financial institution, and Shah is also charged with two counts of transactions in criminal proceeds. Desai is charged with one count of wire fraud. Choi and Han are each charged with one count of conspiracy to commit wire fraud, according to the DOJ.

    The DOJ claims the former executives and employees perpetrated a fraudulent scheme by selling clients—most of whom were pharmaceutical companies—advertising inventory the company did not have and then under-delivering on its advertising campaigns. Despite these under-deliveries, the company allegedly still invoiced its clients as if it had delivered in full. 

    The DOJ also alleges that to conceal under-deliveries, Outcome employees at the time falsified affidavits and proofs of performance to make it appear the company was delivering advertising content to the number of screens in its clients’ contracts.

    RELATED: Health technology startup Outcome Health reportedly misled advertisers with inflated data

    Outcome executives and employees also inflated patient engagement metrics regarding how frequently patients engaged with its devices. Desai allegedly altered studies presented to clients to make it appear that the campaigns were more effective than they actually were, the DOJ said.

    Outcome not only overcharged clients, it also overstated its revenue for 2015 and 2016, according to the charges.

    "The company’s outside auditor signed off on the 2015 and 2016 revenue numbers because Purdy, Desai, Choi, and Han allegedly fabricated data to conceal the under-deliveries from the auditor," the DOJ said. "Shah, Purdy, and Agarwal then allegedly used the inflated revenue figures in Outcome’s 2015 and 2016 audited financial statements to raise $110 million in debt financing in April 2016, $375 million in debt financing in December 2016 and $487.5 million in equity financing in early 2017. "

    The $110 million debt financing allegedly resulted in a $30.2 million dividend to Shah and a $7.5 million dividend to Agarwal; the $487.5 million equity financing allegedly resulted in a $225 million dividend to Shah and Agarwal, according to the allegations.

    "The deception alleged to have been committed by the defendants tricked clients into paying for advertising it failed to deliver and served to falsely inflate the value of Outcome Health,” Assistant U.S. Attorney Brian Hayes, chief of the Criminal Division for the Northern District of Illinois, said in a statement.