Rishi Shah and Shradha Agarwal, co-founders of Outcome Health, won't be able to count on $10 million frozen by the U.S. Attorney's Office to defend themselves against fraud charges.
U.S. District Judge Thomas Durkin ruled today that the money is traceable to the fraud against investors and clients of Outcome Health that Shah and Agarwal are accused of committing.
Shah and Agarwal have said in court filings they expect their defense in the case, which could take two years to come to trial, will cost up to $14 million. They wanted access to $10 million that was frozen at the request of prosecutors after the two were indicted.
Shah and Agarwal founded Outcome Health, which built a network of TVs and later table computers in doctors' offices to display educational content to patients suffering from diabetes and other diseases. They also sold advertising on that network, mainly to pharmaceutical companies.
The company was accused of overstating to advertisers the amount, and success, of the advertising it sold, which inflated the company's financial results, which it used to raise nearly $1 billion in investment and loans. It raised $488 million in one of the largest deals ever for a Chicago tech company in which it was valued at more than $5 billion, a rarity for a private company. Its investors were a who's who locally and nationally, including Goldman Sachs and Pritzker Group Venture Capital, a fund founded by Gov. J.B. Pritzker.
Shah and Agarwal later settled with their investors, which had sued them for fraud, agreeing to return $190 million of $225 million they received from the $488 million investment.
Shah and Agarwal got to keep $31 million in exchange for giving up their indemnification protections in which the company normally would pay for the defense in legal cases arising from their actions as executives. The company also allowed Shah to keep $4 million in unspent legal fees it had set aside for fighting the investor lawsuit.
"In hindsight, Shah and Agarwal likely wish the company was still obligated to indemnify them," Durkin ruled. "But that decision was a privately bargained for exchange that ultimately is irrelevant to the fact that the $31 million is tainted, including the portion they wish to use to pay their attorneys' fees. The tainted funds were properly frozen."
Durkin also ruled: "Besides the $10.3 million at issue on this motion, Shah has about $4 million on account with his attorneys leftover from prior indemnification payments made by the company on his behalf. Agarwal has about $1 million in cash. … The evidence of Shah and Agarwal's finances causes the Court to suspect that they might be able to retain equally sophisticated, but less expensive, defense with the assets that are available to them.
"Feds can keep frozen $10M seized from indicted Outcome Health founders" originally appeared in Crain's Chicago Business.