A federal grand jury is investigating fraud allegations in connection with the scandal that hobbled Outcome Health, a once-high-flying Chicago healthcare advertising firm.
Grand jurors in Chicago heard testimony this week, according to a source familiar with the matter. The U.S. Attorney's office in Chicago declined to comment.
The existence of the grand jury, which hasn't been previously reported, confirms an investigation begun two years ago is moving forward. The probe began after the Wall Street Journal reported the company had misled pharmaceutical advertisers about where ads were running as well as the increases in prescriptions that resulted. Crain's reported in February that the federal investigation was still active.
Outcome, formerly called ContextMedia, rose to prominence by creating a network of TVs and tablets in medical offices that featured educational content about healthcare and charged pharmaceutical companies to advertise on it. The company and its founders, Rishi Shah and Shradha Agarwal, were darlings of the Chicago startup tech community. Growth took off in 2015 and 2016, and in early 2017 it raised nearly $500 million from A-list investors, including Goldman Sachs, Google and Pritzker Group Venture Capital.
Investors sued the founders for fraud after the Wall Street Journal reported allegations by advertisers of inflated numbers. Investors soon disclosed they'd received subpoenas from the U.S. Department of Justice.
Once things began to unravel at Outcome, the company began gathering and storing massive amounts of e-mails, text messages and other communications, both for an internal investigation led by former U.S. Attorney Dan Webb and in response to federal subpoenas. Outcome never disclosed the findings of the internal probe.
The investors soon resolved their suit with Shah and Agarwal, who left day-to-day management of the company in early 2018 and eventually left the board. After the company restructured its finances earlier this year, the founders no longer had ownership.
All the while, however, the FBI continued to interview former employees, according to a person familiar with the investigation. The inquiry appeared to focus on events prior to 2017.
The Chicago Tribune reported yesterday that an affidavit for a federal search warrant that was briefly unsealed this week showed the FBI wanted to search a company laptop last fall. In the affidavit, filed in in November 2018, investigators asserted "there was probable cause to believe" co-founders Rishi Shah and Shradha Agarwal and other employees "conspired to commit wire fraud . . . and committed mail and wire fraud," the Tribune reported.
No charges have been filed against Shah, Agarwal or anyone else in the matter. Attempts to reach Shah and Agarwal today were unsuccessful. They have previously denied any wrongdoing. In a statement, the company said, "The investigation by the Department of Justice is ongoing and Outcome Health remains fully cooperative."
According to the Tribune, the affidavit alleged "certain Outcome employees utilized false and misleading performance studies and accounting records to raise money on at least two separate occasions": a $300 million loan to buy competitor AccentHealth and the $488 million investment led by Goldman.
The affidavit, according to the Tribune report, indicates one of the fraud allegations is that a potential investor was duped into making a $100 million investment by inflated metrics. According to an earlier court filing in the suit by investors, Goldman Sachs invested $100 million.
The $488 million deal was unusual in several ways: It was structured more as debt, with a guaranteed return, than a traditional venture capital or private equity investment. And it guaranteed nearly half the money to Shah and Agarwal. Investors ultimately clawed back more than $100 million. The company recently was recapitalized by a lender, and a new CEO is rebuilding the business.