Founded as Context Media by a couple of Northwestern University students, Outcome became one of Chicago’s hottest startups, especially after it attracted nearly $500 million in venture capital in 2017 from a high-profile roster of investors, led by Goldman Sachs, Google and a fund co-founded by Gov. J.B. Pritzker. Valued at more than $5 billion, it was, for the moment, an uber-unicorn.
Things soon began to unravel after a whistleblower contacted The Wall Street Journal and said the company wasn’t always delivering all the ads that customers had paid for and the success of the advertising in generating prescriptions was sometimes exaggerated. The highly publicized flameout became a black eye for a Chicago tech scene in search of validation.
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Shah, co-founder Shradha Agarwal and Brad Purdy, the company’s former chief financial officer and chief operating officer, each were convicted of fraud after a 10-week trial early last year. Agarwal and Purdy also are scheduled to be sentenced this week.
Shah faced a maximum sentence of 14 to 17.5 years in prison under federal guidelines, but prosecutors sought a 15-year sentence, the same recommendation that was made for Theranos founder Elizabeth Holmes after she was convicted of fraud. The probation department recommended eight years.
The government also is seeking to recover $55 million in ill-gotten gains connected to the Outcome fraud, including Shah's $10 million mansion on North Clark Street. Prosecutors also will seek restitution that likely will total hundreds of millions of dollars.
Shah asked for home confinement.
“I feel tremendous responsibility for what happened at Outcome Health,” Shah told Durkin before he was sentenced. “I’m deeply sorry for what happened to people who entrusted me with money and their careers. As CEO, the buck stops with me.
“I’m overcome with sadness, disappointment and grief. I know the tremendous potential this company had. Because of my failure as a leader, it didn’t realize its full potential. It breaks my heart what happened at Outcome, my own company. Manipulated data . . . inflated financials violated the principles I hold dear.”
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Durkin, however, saw it differently.
"This scheme took place over a number of years," the judge said. "This was not a single mistake. It was lengthy, pervasive and harmful. Lots of young people got pulled into this when they shouldn’t have. There were pharma victims who didn’t get what they paid for, banks and investors who put massive amounts of money into this company that was not as successful as represented. . . .You were an 80% owner. You controlled it."
Durkin addressed head-on several other questions that have been raised about the company and Shah's role in it.
"One of the great tragedies here is you could have been successful without cheating. This was no Ponzi scheme or company that was rotten from the start . . . or even Theranos, where the product didn’t work.
"But you went out over your skis. Frankly I think you wanted to become a billionaire. . . .Greed and ambition I think were your undoing."
The judge, who has been on the federal bench for nearly 12 years, took note of Shah's background as a doctor's son who grew up in the suburbs, calling it a "somewhat aggravating factor" in his sentence.
"You grew up in a two-parent family. You wanted for nothing. You grew up in Hinsdale," Durkin said. "You were well educated. You could have used your intelligence and education for good, not for fraud.
"I can’t tell you how many defendants sit at that table who have either one parent or no parent that raised them. They come in with little or no education, from households afflicted with drug or alcohol addictions, abuse . . . a parade of horribles. . . .It’s not an excuse but a cause. You had none of that. You really had no reason to do these things."
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Since he was indicted nearly five years ago, Shah has fought the government at every turn, waging battles over everything from asset seizures to sentencing and spending millions of dollars.
Everything about the case has been complex, from the nature of the business itself to the multilayered nature of the fraud and the investments and loans the company received.
After the initial fraud revelations, there was litigation, followed by settlements and refinancings by investors and lenders. Shah and Agarwal, who initially received $225 million of the $487 million venture capital round, returned $190 million in a settlement with investors. Durkin noted, however, that Shah got a payout of $30 million from a previous loan to the company.
Outcome ultimately merged with rival PatientPoint. Sentencing in fraud cases depends heavily on the amount of money lost, and prosecutors and defense attorneys have sparred for months over the value of the company and, thus, the losses to investors, lenders and customers. It will continue when the court decides on how much restitution Shah will have to pay.
Prosecutors have characterized the case as a $1 billion fraud, but investors and lenders received some of that money back.
Shah's attorneys argued that lenders and investors ultimately didn't lose any money. Durkin wasn't willing to go that far, but he accepted Goldman Sachs' argument that it lost $70 million of its $100 million investment. That helped reduce the potential for Shah's sentence, but, even so, Durkin noted prosecutors were still asking for less than the maximum.
"The characterization as a billion-dollar fraud is somewhat accurate," Durkin said in imposing sentence. "Nobody lost that amount of money, but no one is giving this amount of money if there’s a whiff of fraud. They gave that money based on you. They believed in you and your company, and they got fooled."
Beyond the actual amount of money lost, Shah’s attorneys argued that the government got it all wrong, that Outcome simply grew too fast for its young founders.
“By 2011 or 2012, Outcome was small but break-even; it was also led by a team of inexperienced kids in their early to mid-twenties,” Shah’s attorneys said in a pre-sentence memo. “When Outcome exploded in growth just a few years later, its founders’ inexperience reared its ugly head, and the operational problems at Outcome worsened.”
Shah has never admitted wrongdoing and never testified during the trial.
“Mr. Shah wanted desperately to take the stand at his trial, if for no other reason than to allow him to take responsibility for his failures and explain his thinking behind the decisions that he made (or failed to make),” his new attorneys, who were hired after he was convicted, wrote in a pre-sentencing memo. “His attorneys forcefully discouraged him from doing so, a decision he regrets to this day.
“Through his reflections, Mr. Shah has come to recognize and acknowledge his failures as CEO, particularly with respect to overseeing and managing a quickly growing startup,” the memo continues. “He knows that, as CEO, he was ultimately responsible for everything that happened at Outcome, including the resulting harms, even if he did not specifically intend them.”
Durkin took issue with what was missing. "Your statement is you regret not being more diligent or that you were negligent. . . .You weren’t convicted for negligence. You were convicted of a crime."
Shah blamed Ashik Desai, a rising young star he hired at Outcome Health who admitted falsifying reports to customers without Shah’s knowledge.
“As described above, in most if not all cases, Mr. Shah took steps to correct Mr. Desai’s misconduct once he learned about it—but as it turns out, those efforts came too late,” Shah’s attorneys wrote.
Desai pleaded guilty to one count of wire fraud and was the government’s main witness in Shah’s trial. He will be sentenced Sept. 20.
Durkin, however, said, "The idea that Ashik Desai, a 20-something with no equity, was somehow the mastermind and evil genius of this fraud. . . .That's just not true. . . .The company had been running on some of these lies before he joined."
He then turned his attention to another central theme of the case: Where is the line between "fake it till you make it" and fraud?
"To anyone listening: Faking it is a crime. It doesn’t matter if you make it," Durkin said. "Entrepreneurs have to know when they have access to capital . . . they have to be accountable. You can’t cheat on numbers. You have to be careful if you’re taking hundreds of millions of dollars from people, and you weren’t."
The damage went beyond lenders and investors, the judge said.
“Particularly egregious was the auditor, Deloitte, was deceived. People rely on Deloitte,” Durkin said. “People rely on accuracy of financial statements. Those were false. The rest is history.”
He also noted the damage to employees. At its peak, Outcome employed about 600 people. “The people who went to work for Outcome will forever be associated with a company that cratered because of the fraud. Some lost their jobs. They all have the tag on them the way that someone who worked for Enron have the tag. . . .They’ll have this on their resume forever.”
This isn’t likely the last we’ll hear from Shah about the case. Star attorney Neal Katyal already is at work on his appeal. Richard Finneran, one of Shah's attorneys who spent nearly two days challenging the amount of losses stemming from the fraud, says Shah plans to appeal both the conviction and his sentence.
This story first appeared in Crain's Chicago Business.
