The Department of Justice and Securities and Exchange Commission (SEC) have brought charges against three former executives of Outcome Health. Rishi Shah, Shradha Agarwal and Brad Purdy were charged with defrauding investors. The government is bringing both criminal and civil charges.
Outcome Health Indictments
Rishi Shah, the 33-year-old former CEO of Outcome Health Systems, was charged with multiple counts of wire fraud, mail fraud, bank fraud and money laundering. Shradha Agarwal, the former President, and Brad Purdy, the former finance chief, were also charged. All three men are facing 30 years or more if convicted.
The indictment says the three conspired to defraud both patients and investors. Outcome Health was formed in 2006 with the idea that the company would advertise pharmaceutical products inside doctors’ offices. In just four years the company said sales rocketed from $7 million per year to $130 million.
Cracks started to appear after the Wall Street Journal published an investigative report claiming the company sales figures were inflated. By cooking the books, the company was able to charge more for ads and generate more capital from investors.
The Journal story ran in October 2017. It claims the company was charging pharmaceutical companies based on the number of screens where their ads appeared. The company claimed it had more screens than were actually installed, however.
One month later, several investors filed suit against Outcome Health as well as Rishi Shah and Shradha Agarwal. The company denied the charges and said, “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.”
Shortly thereafter, Shah and Agarwal resigned and agreed to return the $225 million dividend they had engineered for themselves.
Outcome Health SEC Charges
The SEC charged Shah, Agarwal and Purdy as well as 26-year-old former Executive Vice President Ashik Desai. According to the agency,
“Outcome Health is alleged to have overstated its revenue in its audited financial statements for 2015 and 2016 by at least $14.3 million and $30 million, respectively, while raising approximately $487 million from a private offering to investors who relied on the false financial statements and false representations about the company’s growth. Nearly half of the funds raised went to Shah and Agarwal, Outcome Health’s co-founders.”
The SEC say that beginning in 2016, the four men regaled investors with Outcome Health’s history of “exponential revenue growth”, touted Outcome’s “vast and growing network of participating doctors’ offices”, and shared the results of third-party return-on investment
(“ROI”) studies showing that Outcome’s clients, on average, enjoyed a 5:1 return on their advertising dollar (purportedly more than any other advertising medium).
The picture painted by the four alleged conspirators certainly appeared rosy. The reality, however, was anything but. According to the SEC’s complaint,
“[T]he narrative Outcome spun for prospective investors was a sham. In reality, Outcome’s success was built largely on a simple and pervasive fraud: Outcome was routinely billing clients – and recognizing revenue – for ads it never ran. In the years leading up to the Capital Raise, Outcome routinely lied to its clients at every stage of its ad campaigns.”
In an interesting twist, in 2012 (before the fraud is believed to have started), Shah stated during a pitch to other entrepreneurs the need for getting screens in as many doctor’s offices as possible. He said if Outcome couldn’t deliver, “it’s fraud, right, I mean you’re selling something you don’t have.”
A few years later it appears that he was committing the same type of fraud that he earlier warned about. In 2015 Agarwal described this routine deception of Outcome’s clients as throwing “smoke bombs.”
Like Bernie Madoff, the four senior managers were soon falsifying records to hide billing for screens that didn’t even exist yet. And just like Madoff hired a crooked accountant to hide his crimes and provide legitimacy, the four men are accused of hiring a well known third party data analysis firm. It appears that the men hid the fraud from the auditors just like they hid the fraud from investors and customers.
Between 2016 and 2017, several company analysts left the firm and raised concerns about the company’s business practices. That is an important detail because any one of the analysts could have become SEC whistleblowers. By doing so, they may have been able to stop the fraud earlier and receive a large check from the government. More on that in a minute.
As more and more employees complained, the SEC says that the company either retaliated against them or tried to buy their silence by settling for cash.
In one instance, “Outcome’s newly-hired COO warned Shah that Outcome was failing to deliver on contract obligations and was falsifying ROI reports.” The SEC complaint said, “Rather than ask for details – or instruct the COO to investigate – Shah accused the COO of being abrasive and not being a good “cultural fit” at the company. Immediately after that meeting, the COO resigned after less than three weeks of employment.”
In another instance, the head of Outcome’s Marketing Sciences team sent Shah a letter describing Outcome’s fraudulent conduct, including “artificially inflating the performance results it reports to clients.” The SEC says the company responded by firing her.
It wasn’t just customers that were hearing lies. So were investors and that is why the SEC jumped in. When Outcome Heath needed to raise more money, it could have come clean with investors. Instead the SEC says the four men “misled investors about Outcome’s financial condition and the effectiveness of Outcome’s ad campaigns.”
Even when auditors came in to examine the books, the four men continued the lies and the charade. In fact, Shah, Agarwal and Purdy signed management representation letters that said,
- (i) “We confirm that we are responsible for…[t]he preparation and fair presentation in the consolidated financial statement of financial position, results of operations, and cash flows”;
- (ii) “the financial statements. . . are fairly presented in conformity with GAAP”;
- (iii) “[w]e have no knowledge of any fraud or suspected fraud affecting the Company”;
- (iv) “[w]e have no knowledge of allegations of fraud or suspected fraud affecting the Company’s financial statements communicated by employees, former employees, regulators, or others”;
- (v) [t]here are no transactions that have not been properly recorded and reflected in the financial statements”;
- (vi) “[t]he Company has complied with all aspects of contractual agreements that may affect the financial statements”; and
- (vii) “[t]he Company has met all performance requirements per the applicable revenue contracts for revenue recognized during the year.”
Both we and the SEC believes those statements were blatant lies.
SEC Whistleblower Program
The Justice Department’s criminal process should bring some measure of justice to the ad buyers. The civil suit may help them get back their money too. The SEC’s action allows the government to punish the wrongdoers. As an added bonus, whistleblowers with inside information about the fraud can receive cash rewards of up to 30% of whatever the wrongdoers pay the government.
Many honest Outcome Health workers complained or quit in disgust yet this one on for years before the story got out. Thankfully it did get out!
How do these scams often go on for years? Often would be whistleblowers don’t know how to best report fraud or they fear retaliation.
Reporting Securities Fraud
There are two basic ways of reporting securities fraud. Both are easy. You can report directly to the SEC. Be aware, however, that the agency takes less than 1% of the cases it receives from tipsters.
The other way is by hiring an experienced whistleblower lawyer. We know how to package these claims and get the agency to take action. With over 99% of SEC tips going nowhere, it is critical that you do everything possible to make your case stand out. Simply having a “slam dunk” case isn’t enough. Merely filing a form online doesn’t make your case go to the top of the pile.
We have years of experience as well as the former chief of investigations from the SEC on our team. That gives us two distinct advantages over other law firms. First, we know exactly how to package a case for the SEC.
Second, we know which offices might be more aggressive. We are comfortable meeting with agency staff and getting them interested in our clients’ cases. This personal touch is critical considering the vast majority of SEC complaints never get investigated and prosecuted.
We understand that retaliation is real and causes anxiety. The good news is that its’ also illegal. We work hard to ensure your rights are fully protected throughout the process.
Because the SEC allows anonymous reporting, often we can keep your boss from even knowing that you have started an investigation.
Outcome Media got caught but we know that thousands of businesses are engaged in similar scams. That is where you come in. With your help, we can help stop greed and protect both investors and the public.
To learn more, visit our SEC Whistleblower Program page. Ready to see if you have a case? Contact us online, by email or by phone at 414-704-6731. All inquiries are kept confidential and kept strictly confidential. We handle SEC whistleblower cases on a contingent fee and our services are available worldwide.