Former Outcome Health executives Rishi Shah, left, and Shradha Agarwal arrive at the Dirksen U.S. Courthouse for their federal fraud trial in January.
Outcome Health co-founders Rishi Shah and Shradha Agarwal and former Chief Operating Officer Brad Purdy were convicted of defrauding customers and investors in one of the most high-profile and lengthy white-collar criminal cases in Chicago history.
The jury, which had deliberated a little more than two days, reached the verdict at about 10:05 a.m. today following a trial that lasted more than 10 weeks.
The convictions are the latest and most significant blows yet to the reputations of Shah, Agarwal and Purdy, who went from darlings of Chicago's startup scene to pariahs after allegations that they had defrauded customers made headlines and led to their indictments in 2019.
The case already was a black eye for a Chicago tech community desperate for validation as a player on the national scene. At its height six years ago, Outcome Health was valued at more than $5 billion and seemed destined for an initial public offering. Beyond the notoriety, the massive losses suffered by high-profile venture funds, such as Google's CapitalG, are a negative for other entrepreneurs.
The convictions aren't the end of the problems facing Shah and Agarwal, both 37; and Purdy, 33. They still face civil fraud charges from the U.S. Securities & Exchange Commission.
As with the guilty verdicts against Elizabeth Holmes and Ramesh "Sunny" Balwani in the Theranos fraud case, the guilty verdicts in the Outcome Health trial are a warning that the line between "fake it till you make it" and fraud is one that startup entrepreneurs should approach cautiously. It's also a clear reminder to investors to slow down and do their homework instead of getting carried away by the hype of a hot deal.
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Outcome Health was one of Chicago's highest-flying startups when it raised nearly a half-billion dollars six years ago from investors that included Goldman Sachs, Google and a venture-capital fund formerly run by Gov. J.B. Pritzker.
Then a whistleblower contacted The Wall Street Journal with allegations that the firm had been overbilling pharma companies, such as AbbVie and Pfizer, to advertise on a network of TV and computer screens in doctors' offices and falsifying reports of prescription increases resulting from the ads. After a story detailing those allegations appeared in October 2017, the business quickly went into a tailspin as customers fled. Shah, Agarwal and Purdy were forced out of the company and were indicted two years later.
Advertisers were overbilled $45 million in 2015 and 2016, according to government estimates. Prosecutors estimated that Outcome Health's overbilling had inflated its revenue of $191 million in 2015 and 2016 by about 24%.
The $488 million invested by venture backers has been all but written off. The federal government seized $10 million of the $262 million that Shah and Agarwal took off the table.
The verdict is a high-profile victory for the federal prosecutors in a complex and messy case that was largely circumstantial. The government team was led by assistant U.S. attorneys Matt Madden and Saurish Appleby-Bhattacharjee in Chicago, along with two U.S Department of Justice attorneys on loan from Washington, D.C., Kyle Hankey and Will Johnston.
The complicated case was made even more unwieldy with three defendants.
Although more than 1,500 documents were introduced at trial — including emails, text messages and voicemail — none was a smoking gun. Prosecutors relied heavily on former employees Ashik Desai and analyst David Ma, who were at the center of the scheme, to prove that Shah, Agarwal and Purdy knew about the fraud.
Documents showed the company routinely sold clients more screens and locations than it had in its network, and it didn't tell customers.
Defense attorneys hammered away at the government's case, dissecting internal emails and contractual language to imply that Outcome Health's customers were aware that the startup was selling a network that was in flux, and that any under-delivery wasn't fraud.
"They were all in their 20s, making mistakes, doing the best they could," John Hueston, a former Enron prosecutor who represented Shah, said in an eight-hour closing argument. "They were making it. There was no fraud. Did Mr. Shah commit errors? He sure did. Did he have lapses in judgment? Yes."
Defense attorneys selected emails that suggested customers were aware that Outcome, as a fast-growing company, was clear in negotiations that it was building out the network as it went.
Prosecutors, however, produced a stream of invoices and customers who told the jury they weren't buying projections, but were paying for inventory they didn't receive — something that was repeatedly concealed from them.
"Clients paid tens of millions for services they never received," said Johnston, an assistant chief with Justice Department. "This was fraud on a massive scale. This wasn't an accident, the growing pains of a startup or a result of the actions of Ashik Desai."
Desai, a protege of Shah's who had overseen sales, pleaded guilty to fraud and cut a deal, testifying for the prosecution in exchange for a sentencing recommendation that he receive no more than 10 years in prison. Like all witnesses who cut plea deals, Desai's credibility was damaged from the start. Defense attorneys undercut it further during a week of cross-examination.
Purdy's attorney, Ted Poulos, called Desai "an inveterate liar" and "a malignant tumor at the center of (the government's) case." Hueston, representing Shah, painted Desai as a sort of Svengali of "fraud island," corrupting a team of junior analysts. He also portrayed him as a conniving opportunist who took shortcuts in an effort to feed his own career ambitions, not someone who carried out his bosses' fraud scheme. Added Agarwal's attorney, Koren "Kori" Bell: "He's a very clever liar. . . .He doesn't have any scruples about who he blames."
"There's no honor among thieves," Hankey, also an assistant chief from the Justice Department, told jurors. "These four were in the middle of a fraud scheme. (Desai) lied to protect himself . . . from people he saw were willing to lie to protect themselves."
Desai acknowledged on the witness stand that he had thrown away his integrity by committing fraud and lying about it.
"Desai lost his moral compass and lost it quickly, and he will have to face the consequences," Johnston said. "He didn't start down the road of deception without any prompting from his fellow travelers. Some things he did with no prompting were all in service of the same plan to grow the company by any means necessary. . . .Fake it till you make it."
Prosecutors noted that a steady procession of employees, from junior analysts to executives, raised alarms about the company's business practices.
Among the most damaging was Sameer Kazi, a former Salesforce executive who was the government's first witness. He testified that he quit Outcome after little more than two weeks, giving his laptop and cellphone to Shah after a meeting at Shah's apartment in New York.
"There's no way I could be involved in a situation with a company where I believe there was fraud happening and the CEO didn't see it as a major red flag that needed to be addressed with immediacy and urgency," said Kazi.
This story first appeared in Crain's Chicago Business.
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