Indian-origin start-up executives convicted for $1 bn corporate fraud

A federal jury in the US has convicted two Indian-origin executives of a Chicago-based start-up of running a US$1 billion corporate fraud scheme that targeted the company’s clients, lenders and investors.

After a 10-week trial, jurors on Tuesday (April 12) found health technology company Outcome Health co-founder and former CEO Rishi Shah, 37, guilty on 19 of 22 counts and co-founder and former president Shradha Agarwal, also 37, guilty on 15 of 17 counts.

Former chief operating officer Brad Purdy was held guilty on 13 of 15 counts.

Shah was convicted of five counts of mail fraud, 10 counts of wire fraud, two counts of bank fraud and two counts of money laundering. Agarwal was convicted of five counts of mail fraud, eight counts of wire fraud and two counts of bank fraud.

Purdy, 33, was convicted on five counts each of mail and wire fraud, two counts of bank fraud and one count of making false statements to a financial institution.

Jail terms

The defendants face a maximum penalty of 30 years in prison for each count of bank fraud and 20-year imprisonment for each count of wire fraud and mail fraud.

Shah faces a maximum penalty of 10 years in prison for each count of money laundering. A sentencing hearing will take place later.

The Justice Department said the company installed television screens and tablets in doctors’ offices all over the US and sold advertising space on those devices to clients, most of whom were pharmaceutical companies.

According to evidence, Shah, Agarwal and Purdy sold advertising inventory the company did not have to Outcome’s clients, then under-delivered on its advertising campaigns. Despite these under-deliveries, the company invoiced clients as if it had delivered in full.

Shah, Agarwal and Purdy lied or caused others to lie to conceal the under-deliveries from clients and make it appear as if the company was delivering advertising content to the number of screens in the clients’ contracts.

Purdy and others at the company also inflated metrics that purported to show how frequently patients engaged with the company’s tablets installed in doctors’ offices.

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Crime history

According to the trial evidence, the scheme targeting the company’s clients began in 2011 and lasted until 2017, resulting in at least $ 45 million of overbilled advertising services.

Shah, Agarwal and Purdy were also convicted of defrauding the company’s lenders and investors.

The under-delivery to the company’s advertising clients resulted in a material overstatement of the company’s revenue for 2015 and 2016.

Shah, Agarwal and Purdy utilised inflated revenue figures in the company’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 three lied to investors and lenders to conceal their ongoing under-delivery of advertising campaigns for clients.

The $ 110 million debt financing resulted in a $ 30.2 million dividend to Shah and a $ 7.5 million dividend to Agarwal; the $ 487.5 million in equity financing resulted in a $ 225 million dividend to Shah and Agarwal.

The verdict represented a stunning fall for the three who were once young stars of Chicago’s tech scene.

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Shah’s defence

This may have implications for others in the tech community, with parts of the case focusing on the line between start-ups’ typical growing pains and fraud, the Chicago Tribune reported on Tuesday.

A spokesperson for Shah said in a statement: “Today’s verdict deeply saddens Shah, and he will exhaust every avenue to overturn this result.”

Theodore Poulos, an attorney for Purdy, said: “We are profoundly disappointed with the verdict in this complex and nuanced case, particularly given the plethora of evidence adduced at trial, which showed that certain critical information was intentionally withheld from Purdy.”

Three other former employees of Outcome pleaded guilty prior to trial.

Ashik Desai, the former chief growth officer, pleaded guilty to one count of wire fraud. Kathryn Choi, a former senior analyst, and Oliver Han, a former analyst, both pleaded guilty to conspiracy to commit wire fraud.

Desai, Choi and Han will be sentenced at a later date.

(With agency inputs)