Outcome Health co-founders Rishi Shah and Shradha Agarwal say they are likely to spend up to $15 million to defend themselves against federal fraud charges. And they're asking a judge to free up $10 million they've set aside to pay their lawyers—funds that prosecutors froze when the two were indicted in November.
It's another sign that the closely watched case, which shocked the Chicago startup community when it was filed in November, is likely to be a long, hard-fought battle.
Prosecutors oppose the release of the $10 million, saying the money came from the very fraud Shah and Agarwal are accused of committing: lying to customers about the amount and success of advertising sold to them by Outcome, which inflated the financials that investors relied upon to make a $488 million investment that valued the company at more than $5 billion.
Shah and Agarwal, as well as former Chief Financial Officer Brad Purdy, have pleaded not guilty to the charges. Ashik Desai, a young executive at the center of case, pleaded guilty and is cooperating with the Justice Department.
In court filings Friday, Shah and Agarwal's attorneys revealed details about the duo's finances and about the settlement two years ago of a civil suit brought by their investors, who were led by Goldman Sachs and included Pritzker Group Venture Capital.
Shah was a paper billionaire after the investment in spring 2017, which landed him on the Forbes 400 list of the wealthiest Americans, but today he's house-rich and cash-poor, according to court filings.
Today, Shah says he has $29,000 in a checking account, $383,000 in a brokerage account and a 2018 Land Rover. He also owes $192,529 in property taxes on an unspecified property. (Shah pledged a building at 924-26 N Clark St. that's valued at $8 million as part of his $20 million bond.) Shah also says he may be facing an $8 million tax bill connected to the $100 million recapitalization last year of Outcome Health.
Agarwal says in court filings that she and her husband have homes in Chicago and Austin, Texas, valued at about $2.6 million, brokerage accounts worth about $1.8 million and bank accounts totaling $1.1 million. Agarwal says she may face a $2 million tax bill related to Outcome's recapitalization.
Neither Shah, the former CEO, nor Agarwal, former president, have found work since they were ousted from their jobs that paid each of them $500,000 a year in a settlement with investors two years ago, according to court filings. They claim they gave up their right to indemnification—which meant the company would have paid their legal bills—as part of the deal with investors.
In court filings, Shah and Agarwal say most of the $31 million they received in the settlement is tied up in Jumpstart Ventures, a venture fund that invested in startups, and other investments, which, unlike stock holdings, aren't easily converted to cash.
The court's order to protect the funds, which the government intends to seize if it proves its case, was filed under seal.
But much of the details are revealed in other filings. When they raised $488 million from investors for their health care-advertising company nearly three years ago, Shah and Agarwal got a $225 million dividend.
After a Wall Street Journal story suggested Outcome may have defrauded customers, investors sued to seize the payout, most of which hadn't been spent. In the settlement that followed, the co-founders got to keep $31 million but returned $159 million to the company and $31 million to investors, according to court filings.
When they indicted Shah and Agarwal, federal prosecutors sought a forfeiture of the $31 million and a protective order to keep them from spending it until the trial is finished.
Documents filed by Shah and Agarwal show they set aside $10 million of the $31 million they received in their settlement with investors for legal fees.
"Without using the $10.3 million that they already transferred to (law firms) Quinn Emanuel and McGuireWoods, Mr. Shah and Ms. Agarwal do not have sufficient alternate assets with which to pay for their legal expenses," the filing states.
In the filing, Shah says about $4 million of his retainer remains unspent.
Attorneys for Shah and Agarwal argue the money is rightfully theirs, as a contractual settlement for giving up indemnity protection from the company.
"The defendants' motion cannot bypass a simple, unchanging fact: that the $10.3 million they seek to utilize are proceeds of the fraudulently obtained $225 million dividend payment," prosecutors said in a court filing. "Neither the settlement agreement as a whole nor any of its particular terms can transform dirty forfeitable money into clean non-forfeitable money."
This article was originally published in Crain's Chicago Business.
