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High-flying Chicago tech entrepreneurs Rishi Shah and Shradha Agarwal charged in $1 billion fraud scheme

By Hi India Staff

Chicago: Allegations of an approximately one-billion-dollar fraud scheme by US federal prosecutors have dramatically upended what seemed like storied tech careers of two Chicago-based Indian Americans Rishi Shah, 33, and Shradha Agarwal,34.

Shah and Agarwal, former chief executive officer and president respectively of the once high-flying health-tech company Outcome Health, face a 26-count indictment filed in the Northern District of Illinois on November 25. While attorneys for the two have denied all allegations, the scope of the indictment is significant as it says they were “charged for their alleged roles in a fraud scheme that targeted the company’s clients, lenders and investors, and involved approximately $1 billion in fraudulently obtained funds.”

Two others, Brad Purdy, 30, of San Francisco, California, the chief operating officer and chief financial officer; and Ashik Desai, 26, of Philadelphia, Pennsylvania, the executive vice president of business operations and, more recently, the chief growth officer of Outcome, have also been charged in the superseding indictment. Along with them also charged are Kathryn Choi, 29, of New York, New York, a senior analyst; and Oliver Han, 29, of Chicago, an analyst.

“An initial appearance and arraignment for Shah, Agarwal and Purdy in federal court in Chicago have not yet been scheduled. An initial appearance and arraignment for Desai are set for Dec. 3, 2019, at 10:00 a.m., before U.S. District Judge Thomas M. Durkin,” an official statement by the Department of Justice said.

“Outcome’s former executives and employees allegedly deceived lenders, investors, and their own auditors by falsely representing revenue for additional profit,” said Principal Deputy Assistant Attorney General John P. Cronan of the Justice Department’s Criminal Division.  “The charges announced today demonstrate that lies and deception cannot serve as the basis for any company, including start-up companies, to falsely grow revenue for additional capital and private gain.”

“The deception alleged to have been committed by the defendants tricked clients into paying for advertising it failed to deliver and served to falsely inflate the value of Outcome Health,” said Assistant U.S. Attorney Brian Hayes, Chief of the Criminal Division for the Northern District of Illinois.  “Our office will continue to investigate and hold accountable those who perpetrate fraud schemes.”

“These charges demonstrate that the FBI and its partners will hold businesses accountable for their misconduct,” said Deputy Special Agent in Charge Larry L. Lapp of the FBI’s Chicago Field Office.

“The defendants were charged with allegedly over-inflating the company’s revenue figures in order to fraudulently obtain loans from banks,” said Inspector General Jay N. Lerner of the Federal Deposit Insurance Corporation’s Office of Inspector General (FDIC-OIG).  “This scheme was orchestrated by former leaders of the organization who personally benefitted from hundreds of millions of dollars.  We are committed to working with our law enforcement partners to investigate individuals involved in the crime and to preserve the integrity of the banking system.”

Founded in 2006 as ContextMedia prior to 2017, Outcome Health’s Shah and Agarwal quickly became a high-profile success emerging from Chicago’s vibrant tech startup world. Its business was to stream pharmaceutical ads on televisions and computer tablets in various medical offices.

“As alleged in the superseding indictment and information, from 2011 to 2017, the former executives and employees of Outcome, a digital provider of medical information and advertising in doctors’ offices, sold tens of millions of dollars of advertising inventory that did not exist.  This allegedly resulted in inflated financial statements that the former executives used to raise nearly $1 billion in debt and equity financing in 2016 and 2017,” the DoJ said.

This inflated inventory claim helped Outcome raise $487.5 million of equity financing and borrow $485 million. Among the investors were the marquee Chicago name Pritzker Group, Google parent Alphabet Inc. and Goldman Sachs Group Inc.

“Shah, Agarwal and Purdy are each charged with various counts of mail fraud, wire fraud and bank fraud.  Purdy is also charged with one count of false statements to a financial institution, and Shah is also charged with two counts of transactions in criminal proceeds.  Desai is charged with one count of wire fraud.  Choi and Han are each charged with one count of conspiracy to commit wire fraud,” the DoJ said.

Shah and Agarwal were students at Northwestern University when they founded it in 2006. As the company’s valuation grew to $5.5 billion in 2017 following major investments, Shah and Agarwal became the toast of the Chicago tech world. Shah made it to the Forbes 400 list in 2017.

“According to the allegations, the former executives and employees perpetrated a fraudulent scheme by selling clients—most of whom were pharmaceutical companies—advertising inventory the company did not have and then under-delivering on its advertising campaigns.  Despite these under-deliveries, the company allegedly still invoiced its clients as if it had delivered in full.  To conceal the under-deliveries, the former executives and employees allegedly falsified affidavits and proofs of performance to make it appear the company was delivering advertising content to the number of screens in its clients’ contracts, and also inflated patient engagement metrics regarding how frequently patients engaged with Outcome’s tablets.  Furthermore, Desai allegedly altered a number of studies presented to clients to make it appear that the campaigns were more effective than they actually were,” the DoJ said.

The charging documents also allege that the under-delivery resulted in a material overstatement of Outcome’s revenue for the years 2015 and 2016.  The company’s outside auditor signed off on the 2015 and 2016 revenue numbers because Purdy, Desai, Choi and Han allegedly fabricated data to conceal the under-deliveries from the auditor, the DoJ said.

“Shah, Purdy and Agarwal then allegedly used the inflated revenue figures in Outcome’s 2015 and 2016 audited financial statements to raise $110 million in debt financing in April 2016, $375 million in debt financing in December 2016 and $487.5 million in equity financing in early 2017.  The $110 million debt financing allegedly resulted in a $30.2 million dividend to Shah and a $7.5 million dividend to Agarwal; the $487.5 million equity financing allegedly resulted in a $225 million dividend to Shah and Agarwal,” it said.

The attorneys for Shah and Agarwal both independently their clients’ innocence.

William Burck, a lawyer for Shah, was quoted as saying by Reuters that his client was being “scapegoated” for the wrongdoing of others who cut deals with prosecutors. “Mr. Shah will plead not guilty to these charges because he is, in fact, not guilty,” Burck said in a statement.

Also according to Reuters, Christina Egan, a lawyer for Agarwal, said in response to the SEC lawsuit that her client denied the agency’s allegations and would defend herself in court. “Shradha never committed fraud and never participated in any conspiracy,” Egan said.

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