“The lesson there is don’t cross the line,” says Steven Kaplan, a professor at the University of Chicago’s Booth School of Business who teaches entrepreneurship to would-be founders. “What I tell my students is: investors want to hear you say that things are going to grow to the moon. You can be very positive, but you can’t lie. If you do, there’s a good chance you go to jail.”
From the outset back in 2006, the Chicago-based company was “selling the future,” as Shah liked to put it. He colorfully called it “throwing a smoke bomb” in an interview nearly a decade ago, describing the delicate dance required early on to persuade doctors to sign up for TVs the company didn’t yet have and getting drug makers to put ads on a network that wasn’t yet built. Agarwal was accused by a whistleblower of using the same description.
It would come back to haunt the founders after they were charged with overbilling drug companies to advertise on more TV and tablet computer screens in doctors’ offices than they had signed up for. They billed customers in full, which inflated the financial results they provided to lenders and investors.
The video of Shah and Agarwal became a focal point of prosecutors’ opening statement to the jury, which would convict them and Purdy of more than a dozen counts of fraud each, despite a lengthy trial in which defense attorneys argued that the startup was selling growth in a startup that was scaling so fast it was hard to predict. As the company matured, the defendants had to rely on others to handle day-to-day operations, but they shouldn't be held responsible for bad actors who lied to them.
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“I’m not surprised” at the convictions, said Kelly Richmond Pope, a professor of forensic accounting at DePaul University and author of “Fool Me Once,” a book about white-collar fraud. “The jury was able to see clearly what the execs should have known and what they should not have known. Some of the things were straight fraudulent activities like lying about how many doctors’ offices had screens and tablets running their content.”
Outcome joins Theranos, the Silicon Valley blood-testing startup, in tech fraud infamy. Theranos' founder, Elizabeth Holmes, and its president, Ramesh “Sunny” Balwani, were convicted of fraud for lying to customers as well as investors.
In the case of Outcome, unlike Theranos, there was a real product being used by real customers that produced real revenue and, for most of its existence, real profits. Not every ad campaign was falsified. Prosecutors estimated the fraud involved about 25% of its revenue but told jurors, “This case isn’t about the times they didn’t commit fraud: It’s about the times they did.”
Although the trial was long, and the minutiae of advertising contracts often complex, Richmond Pope said the case was relatively simple.
“It's one thing to talk about revenue-recognition principles,” she says. “It’s another to talk about: did you lie about what your sales numbers were? Yes or no. Did you lie about where they came from? Did you tell clients the truth or not? Did you tell investors the truth or not? Those are clear-cut answers.”
The criminal convictions are “good for the system,” Kaplan says. “When you have people who are dishonest, you can get away with it for some of the time, but it comes back to bite you. It happened with Theranos, … and it definitely happened here. At the end of the day, you have to deliver. If you don’t you’ll be caught at some point.”
This story first appeared in Crain's Chicago Business.