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December 4, 2019

How a health startup allegedly pulled off a $1B fraud. (Hint: 'Big promises' and 'hot air.')

Daily Briefing

    Founders of the startup Outcome Health used "big promises" to defraud clients and investors out of nearly $1 billion, according to a STAT+ report about a federal indictment made public on Monday and related charges filed by the Securities and Exchange Commission (SEC).

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    Outcome was founded in 2006 by Chicago-based entrepreneurs Rishi Shah and Shradha Agarwal, with Shah owning 80% of the company and Agarwal owning 20%.

    The company installed video flat screens in doctors' offices at no cost to the providers, and then charged drugmakers to run ads on the screens, with the implication that they would be viewed by patients. The company's objective was to replace old advertising strategies, such as posters and pamphlets, with updated technologies.

    The startup claimed to be accomplishing its objective, stating that it had delivered "health intelligence to more than half a billion patients a year" and had screens in 20% of U.S. doctors' offices. Outcome also claimed it would eventually have screens in 70% of all doctors' offices. 

    Outcome even described itself as a pioneer in digital health, with one video on its website claiming one of the company's flat-screen wallboards "saved [a] patient's life."

    The claims

    But SEC and the Department of Justice (DOJ) in recently filed complaints said Shah and Agarwal falsely inflated these percentages.

    According to STAT+, federal prosecutors are charging the founders with defrauding clients and investors out of nearly $1 billion in investments. SEC in its complaint alleged Outcome scammed investors like Goldman Sachs, the Pritzker Group, and Google parent company Alphabet out of $487 million, adding that the founders misled clients and investors about the number of doctors' offices that had the flat screens as well as how many patients actually saw drugmakers' advertising materials. SEC also claimed the company purposefully misled investors about its revenue numbers.

    According to the claims, Outcome would charge drug companies for its advertising services based on the number of screens installed at offices on the drugmaker's "target list," but would sometimes charge clients for more screens than it'd actually installed. Some employees of the company claimed Outcome would even charge for doctors' offices it hoped would install screens, but hadn't yet.

    The charges also accuse the founders of manipulating the results of surveys that measured how patients and doctors responded to the ads so that it appeared that more patients participated, the Wall Street Journal reports.

    DOJ also claimed there were instances when Shah and Agarwal seemed aware they were committing fraud. "[A]ny time we're having a back and forth discussion on what data to use, let's take the [sponsorship sales] person off the chain," DOJ claimed Agarwal said in an email. The email continued,  "I've noticed their confidence level in our data change dramatically when presenting to clients if they believe it's accurate vs. made-up."

    The lawyer representing Shah did not respond to STAT's request for comment, but told the Journal that Shah "looks forward to … the opportunity to clear his name." The lawyer representing Agarwal said Agarwal denies all allegations.

    How they got away with it

    The "made-up" revenue and target list numbers allowed Outcome to make millions of dollars in investments, STAT+ reports.

    Outcome said the $487 million from investors boosted the company's worth to $5.6 billion and made Shah a billionaire on paper, according to STAT+. Shah and Agarwal also allegedly shared a $225 million dividend that was taken out of the investment.

    However, the alleged scam went on until 2017, when a story in the Journal about the accusations led Shah and Agarwal to resign—and to agree to give back most of the $225 million dividend.

    But until that time, Shah and Agarwal had flown under the radar, according to STAT+. Shah had even been named on Forbes' 40 under 40 list as well as its list of "newest billionaires," the Journal reports.

    According to STAT+, the debacle, which occurred more than a year after the Theranos scandal, further proves that investors will put millions of dollars "on nothing but hot air," falling for "big promises" that could turn out to be fraud (Herper, STAT+, 11/26 [subscription required]; Konrad, Forbes, 5/30/17; Winkler, Wall Street Journal, 11/25; Winkler, Wall Street Journal, 10/13/17).

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