A New York state judge on Monday refused to freeze $225 million given to Outcome Health's co-founders as part of a recent funding round.
Justice Eileen Bransten criticized investors for amending their lawsuit, which the defendants didn't receive until Monday morning, forcing a delay in the case as the holidays loom near. She did not indicate when she will rule.
The investors, including funds managed by Goldman Sachs' and Google parent Alphabet's investment units, want the judge to freeze the money, arguing that co-founders Rishi Shah and Shradha Agarwal misled them into investing because the financials and other materials they received from Outcome relied on falsified reports about the effectiveness of advertising campaigns.
The co-founders maintain that the $225 million belongs to them, not Outcome Health, and can't be seized due to any alleged wrongdoing by their colleagues.
Bransten noted that both sides haven't had an opportunity to brief the court appropriately about the allegations. A temporary restraining order "is the kind of thing that deprives the founding partners of the use of their own money," she said.
Outcome Health installs video screens in doctors' offices to display educational content as well as pharmaceutical advertising to patients. But the Chicago-based startup has come under fire recently for allegedly overcharging its pharmaceutical customers by claiming it was running their ads on more screens than it had installed in physician offices.
Now, Outcome Health is in a "precarious position," according to Michael Carlinsky, an attorney representing Shah and Agarwal in the lawsuit. If Bransten were to freeze Shah's and Agarwal's $225 million stemming from the funding round, it could damage the company's ability to stay afloat, and the investors haven't proven there was a fraud committed, or that Shah and Agarwal were involved, he said.
"What about the way the rest of the world perceives this?" Carlinsky said. "The rest of the world knows judges don't (freeze funds) willy-nilly."
After the hearing, Carlinsky said in a statement that Shah and Agarwal are hopeful they will be able to use the $225 million to reinvest in Outcome Health.
So far, Chicago area providers Advocate Health Care and Edward-Elmhurst Health have said they will hold off on expanding their use of Outcome Health's technology.
Despite multiple attempts to glean raw data from Outcome Health to investigate the fraud allegations, the investors claim Shah has refused to hand over the information, and that he and his deputies "sought to frustrate" the fact-finding efforts.
According to Goldman Sachs, 10 of the 28 case studies Outcome Health handed over to investors included inflated results about the effectiveness of the pharmaceutical companies' ad campaigns. The investors' amended complaint detailed "chapter and verse" of the alleged fraud, according to Marc Wollinsky, an attorney for several of the funds.
The investors also said they had received subpoena requests from the U.S. Attorney's Office for the Northern District of Illinois as well as the U.S. Securities and Exchange Commission about Outcome Health's alleged fraud, and investigations have been opened.
The investors asked Bransten to freeze $225 million of the $487.5 million investment, which had been earmarked for Shah and Agarwal and left in an Outcome Health subsidiary to avoid taxes. The investors claim the funds are likely the only way they can recoup some of their investments, and they believe Shah and Agarwal have already moved millions of dollars into another account after a Wall Street Journal report detailed the alleged fraud.
Shah and Agarwal called the investors' request "baseless" in court documents, noting the Wall Street Journal article explicitly stated that they weren't involved in any wrongdoing. Outcome Health has hired former U.S. Attorney Dan Webb to investigate the fraud claims via an internal review of the company's documents and employees. So far, Webb has found no evidence of misconduct, Outcome Health said Monday.
It is unclear when the parties will appear in court again, as Outcome Health, Shah and Agarwal need time to respond to the expanded allegations. Bransten made it clear there would not be a hearing in the next few days.