Three former Outcome Health employees were criminally charged in connection with allegations of fraud by the healthcare-advertising company that was once one of the most-watched startups in Chicago.
The U.S. attorney's office in Chicago charged Ashik Desai, a former vice president, with wire fraud; former analysts Kathryn Choi and Oliver Han were charged with conspiracy to commit wire fraud in connection with a scheme to defraud advertisers and investors in the company.
They are the first criminal charges to result from the implosion of Outcome, formerly called ContextMedia, two years ago after the Wall Street Journal revealed that the company had misled customers about the size and effectiveness of its advertising network in doctors' offices.
Also, the Securities & Exchange Commission yesterday sued Desai, alleging fraud against high-profile investors—led by Goldman Sachs and including Pritzker Group Venture Capital and the venture capital arm of Alphabet, the parent company of Google—which injected nearly a half-billion dollars into Outcome in 2017.
The SEC seeks unspecified civil penalties against Desai. Choi and Han are not named as defendants in the SEC suit.
The company reached a settlement last month with the Justice Department that consisted of $70 million in restitution with advertisers, most of which has been paid.
The co-founders of the company, Rishi Shah and Shradha Agarwal, who are identified by title but not by name in court filings, have not been charged, nor were they named in the SEC suit, although their actions are outlined in detail. The suit also mentions the company's former chief financial officer but does not name him, and he is not a defendant in the suit.
In dual criminal and civil complaints, the federal government portrays Outcome as a carefully constructed house of cards that came crashing down when employees—some of whom were leaving and others who were joining the company—raised concerns about fraud.
Outcome drew national attention when it raised $478 million from Goldman and the other investors in early 2017.
By late in the year, the Wall Street Journal revealed that Outcome had been forced to repay advertisers for inventory they purchased but didn't receive and that it had overstated the increases in prescription sales that drug companies received from the advertising.
Investors realized they had relied on the same information and sued. The backers, who now control Outcome, ultimately settled with the founders, who eventually left the company and gave up their ownership stakes.
In its suit, the SEC said Desai and other executives "regaled investors with Outcome'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 studies showing that Outcome's clients, on average, enjoyed a 5:1 return on their advertising dollar (which was more than any other advertising medium).
"Unfortunately, the 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.
"Outcome was forced to offer refunds and free future advertising to its clients, Outcome's revenue plummeted, and investors—who assumed ownership of the company—were left to pick up the pieces."
Desai, 26, who was named to Crain's 20 in their 20s list in 2016, was a rising star within the company, which by then was a darling of the Chicago tech scene.
In the criminal case, the feds say Desai was at the heart of what it alleges was a fraud on advertisers, overcharging them for advertising on TV screens in doctors' offices that weren't on its network. He also deceived advertisers by inflating data about how often patients clicked on tablets, according to the document. The misstated advertising results resulted in inflated financials, which were used to raise money from investors.
Prosecutors said advertisers were overbilled for at least $25 million. The SEC said in its lawsuit that Outcome's revenue was falsely inflated by about 23 percent a year in 2015 and 2016.
The U.S. attorney alleges that Desai committed wire fraud by sending an email to the company's chief financial officer, who was not identified by name, asking how to conceal the fraudulent advertising results from auditors.
Choi and Han reported to Desai, and they were involved in matching the lists of doctors' offices where pharmaceutical companies wanted to advertise with the list of offices where Outcome had TV screens installed. They're accused of inflating the amount of Outcome inventory, sometimes faking lists of matches given to advertisers, according to court documents. Choi is accused of creating internal reports that documented the gap between what advertisers were promised and the offices that actually were delivered.
Outcome initially chalked up the shortfalls as unintentional and the result of a fast-growing company whose network was adding large numbers of doctors' offices between the time it signed contracts and when the advertising was delivered.
The SEC said in its lawsuit: "Outcome forecasted the number of offices and devices it hoped to install by a certain date and then contracted with the client to run ads in those offices and devices (without actually telling the client that the identified offices and devices were a "projection"). Executives A-C and Desai referred to this solution as 'selling on futures.'"
In one instance cited by prosecutors, Outcome told a pharma client its advertising was playing in 300 doctors' offices when those ads were playing at 129 locations.
The SEC said in its suit that "Outcome delivered less than 50 percent of promised devices for at least 10 of Outcome's largest 35 campaigns by revenue in 2015."
The problem didn't get better with time. The SEC said that in mid-2016 "over half of 137 campaigns sampled had significant delivery failures including 55 campaigns with delivery rates below 60 percent."
Choi and Han are accused by prosecutors of deceiving auditors who asked for proof that Outcome delivered advertising it had sold. They're also accused of lying to advertisers who discovered discrepancies in data about patient interactions with Outcome's tablets.
The SEC contends the fraud at Outcome went on for several years, despite a list of warnings it details in the lawsuit.
The suit says some employees raised concerns about fraud during exit interviews. The SEC says the company reached a financial settlement with a salesperson who raised fraud concerns. A senior executive brought in from outside the company discovered the problems of inflated inventory and performance results and sounded the alarm, according to the SEC lawsuit. The executive quickly left the company.
Another executive who sounded the alarm in a letter was fired, the SEC suit says. That executive's replacement made similar allegations of fraud, then resigned and received a settlement from the company, according to the complaint.
This article was originally published in Crain's Chicago Business.
