Outcome Health founders head to trial in Chicago over alleged $1 billion fraud scheme

Much has happened in the world since two young entrepreneurs — once stars of Chicago’s tech scene — were charged with criminal fraud. In recent years, many Chicagoans may have forgotten about the spectacular rise and fall of Outcome Health and its founders.

But Chicagoans are about to be reminded, in a big way. Three years after they were charged, the trial of former Outcome Health CEO Rishi Shah and former Outcome President Shradha Agarwal is set to begin this week in Chicago.

A jury will examine whether Shah, Agarwal and a third former executive, Brad Purdy, participated in an alleged $1 billion fraud scheme. Their company, Outcome Health, placed screens and tablets in doctors’ offices and waiting rooms that ran educational content and pharmaceutical ads. But federal prosecutors allege that the three lied about how many doctors’ offices had screens and tablets running their content. They allege that the trio then used those exaggerated numbers to overcharge drug companies for advertising and inflate revenue figures used to get loans and raise money from investors.

All three have pleaded not guilty to the charges, which include mail fraud, wire fraud and bank fraud. Some of the counts carry sentences of up to 30 years in prison. Lawyers for the three did not respond to requests for comment or declined to comment.

Jury selection is scheduled to start Tuesday, and opening arguments could happen in the following days.

The trial could last more than three months, and is expected to be complex, with thousands of exhibits, and testimony from a number of former Outcome employees.

“It’s a big case. There are very significant consequences,” said James Roberts, a former Manhattan assistant district attorney who now represents companies and individuals as counsel with the law firm Schlam Stone & Dolan in New York City, and is not involved in the trial. “You’re talking about people who were very well-known personalities in Chicago, and it’s a very serious allegation when you talk about how much money was involved.”

A company is born

The idea for Outcome Health was hatched while Shah and Agarwal were still students at Northwestern University. Shah and another friend founded the company in 2006, calling it ContextMedia. That friend left the company after a few years, and Agarwal, who had helped early on, joined the company full time after she graduated from Northwestern in 2008.

Within a few years, the company began to blossom, growing its network of hospitals and clinics and taking on big-name clients. In 2016, the company acquired competitor Accent Health and soon after changed its name to Outcome Health.

Outcome took off like a rocket ship. It raised $487.5 million in outside funding in 2017, rising to a valuation of about $5.5 billion. Investors included a fund co-founded by Gov. J.B. Pritzker and units of Goldman Sachs and Google.

The company grew from only 35 employees to more than 600, Shah said at a 2017 news conference, where he stood alongside former Mayor Rahm Emanuel to announce that it planned to hire another 2,000 workers by 2022.

At one point, the company said it was considering an initial public offering.

Shah and Agarwal’s fortunes rose with the company’s. Shah, who owned 80% of Outcome, was named to the Forbes 400 ranking of richest Americans in 2017, with a net worth of $3.6 billion at the age of 31. Agarwal owned 20% of the company.

Between the $487.5 million from investors, and loans secured in 2016, the pair received more than $260 million in dividends, according to a court filing by the government.

It wasn’t long, however, before it all came crashing down.

In 2017, a former Outcome analyst contacted a Wall Street Journal reporter with concerns about the way the company was doing business. In October of that year, the newspaper published an article saying that employees had misled advertising clients with manipulated information.

Shortly after the article ran, the investors who had sunk $487.5 million into the company in 2017 sued Outcome, Shah and Agarwal, alleging Outcome misled advertisers and investors about the company’s performance. Pharmaceutical advertisers yanked tens of millions of dollars in ads and many health systems backed away from the company. More than one-third of the company’s workforce took buyouts.

The company and its former executives faced lawsuits and investigations over the next few years.

Outcome settled the lawsuit by investors in early 2018. At that point, Shah and Agarwal stepped down from daily operations of the company, and, six months later, resigned from their board positions.

In 2019, Outcome agreed to pay $70 million to pharmaceutical companies to resolve a federal fraud investigation. As part of the agreement, Outcome admitted that from 2012 to 2017, former executives and employees “perpetrated a scheme to defraud its clients — most of which were pharmaceutical companies — by selling advertising inventory that it did not have,” the Justice Department said in a news release.

The federal investigation into individual company leaders, however, was ongoing, and just a month after the $70 million settlement, Shah, Agarwal, Purdy and former executive Ashik Desai were charged with a combined 26 counts of fraud. Desai quickly pleaded guilty to one count of wire fraud. Two other former analysts also pleaded guilty in a related case, admitting to participation in a conspiracy to oversell Outcome’s inventory and conceal the overselling and underdelivery from clients and an auditor, according to a court filing.

Desai, then 26, had been Outcome’s executive vice president of business growth and analytics.

What to expect at trial

In the upcoming trial, Desai is expected to be a star witness. Desai has not yet been sentenced, but the government is expected to recommend a reduced amount of time in prison if he cooperates and testifies truthfully.

Desai is expected to testify that Outcome told pharmaceutical company clients that it had screens in more doctors’ offices than it really did and underdelivered on ad campaigns while charging clients as if it had delivered in full, according to a court filing by the government. He’s also expected to testify about alleged efforts to deceive an outside auditor who examined Outcome’s business, and that he repeatedly presented misleading return-on-investment results to clients.

“Desai will testify that eventually he began to alter the key numbers in the reports before the information was sent to clients,” according to the filing. “He did this in order to conceal the underdeliveries from the clients, and to make it appear that Outcome had delivered in full on its ad campaigns and that the ad campaigns performed well.”

Desai, who was put on leave shortly before the Wall Street Journal article was published, is expected to testify about Purdy, Agarwal and Shah’s roles in the alleged scheme.

The government alleges that Shah, Agarwal and Purdy each played a “crucial role” in the fraud. Shah and Agarwal instituted the practice of sending clients “aggressive (and unrealistic) ‘projections of Outcome’s inventory,’ ... which set in motion Outcome’s inevitable and pervasive underdeliveries on clients’ advertising campaigns,” according to the government. They then instructed their subordinates to hide that data from Outcome’s salespeople and by extension, its clients, the government alleges.

Meanwhile, Purdy was involved in supplying clients with inflated lists of doctors’ offices where their advertising would run, helped inflate other numbers, knew about the underdeliveries and helped raise cash from lenders and investors based on inflated revenue numbers, the government alleges.

But in a court filing, Purdy’s attorneys wrote that Purdy never thought, until shortly before the Wall Street Journal article was published, that anyone at Outcome had intentionally defrauded clients. Instead, Purdy’s attorneys place the blame squarely on Desai, calling him a “master con man.”

Purdy maintains that he was unaware that Desai was falsifying return-on-investment reports.

According to Purdy’s filing, Outcome operated on a weighted average system, meaning it was understood that Outcome might initially underdeliver on a contract, but because the company was growing so rapidly, it would overdeliver later on, so that, on average, it would have played ads on the required number of screens over the course of a contract.

“In light of Outcome’s tremendous inventory growth and the weighted average approach, Mr. Purdy always believed that Outcome could, would and did meet its inventory needs and contractual obligations,” according to Purdy’s court filing. “As such, there was no reason for Mr. Purdy to be alarmed or concerned when he learned from time to time ... that Outcome was underdelivering on some contracts, especially in the first half of a contract term.”

A number of other former Outcome employees are also expected to testify. The government is alleging that Shah, Agarwal and Purdy repeatedly “marginalized, undermined and ignored whistleblowers who raised concerns about the fraud.”

The government alleges that one executive, hired as chief operating officer in early 2017, stayed on the job for only three weeks. That executive learned of the alleged fraud and confronted Shah about it, according to the government. “Based on Shah’s reaction to the issues Executive A raised, at a certain point during the meeting, Executive A decided that he no longer wanted to work at Outcome,” the government wrote.

The government alleges that other employees who raised concerns also left, negotiating and signing separation agreements with Outcome. In written exit interview questionnaires, several analysts who left the company in 2016 wrote that they had ethical concerns, according to the government.

Many will be watching

During the trial, the burden will be on the government to show that Shah, Agarwal and Purdy intended to defraud the victims, Roberts said.

The government has to establish that representations made by the defendants about the business were “made with the intent to defraud as opposed to simply talking up the business,” Roberts said.

“There are times when a business or someone in the business is making various statements that are, let’s say optimistic, but subsequently turn out not to be able to be fulfilled, and is that, in and of itself, a crime?’” Roberts asked. “I would say the answer is not necessarily.”

At the moment, the arguments already presented by the government may sound damning, but in criminal trials, such as this one, the defense doesn’t typically lay out its side until after the trial begins, he said.

“The defense hasn’t had their say yet, and a lot of that will remain sort of unknown until the opening statement of the defense,” Roberts said.

Nationally, it’s a case that could grab attention as the latest in a string of high-profile executives being held to task for alleged fraud. The fraud conviction of Theranos founder Elizabeth Holmes, and legal actions surrounding the collapse of cryptocurrency exchange FTX and its founder Sam Bankman-Fried are fresh in many people’s minds.

The Outcome trial is yet another reminder that “fraud, that overstating your success or earnings are not good strategies for long-term success, and that there are consequences, even criminal consequences, for that kind of bluster or dishonest optimism,” said Nicola Sharpe, a professor at the University of Illinois College of Law and associate academic director of the Center for Professional Responsibility in Business and Society at the university’s Gies College of Business.

Locally, many will likely watch the trial closely, given how prominent Outcome and its founders were before their downfall. In March 2021, Outcome combined with company PatientPoint to create a new firm called PatientPoint Health Technologies.

During Outcome’s heyday, Shah and Agarwal were familiar faces in the local entrepreneurial community. They mentored other entrepreneurs, and Shah served on the boards of health-tech incubator Matter and tech hub 1871.

Chicago business leaders once held up the company as proof of the city’s worth as a business and tech destination that could compete with East Coast cities and Silicon Valley.

Former Mayor Rahm Emanuel once called Outcome’s growth “a testament to Chicago, to the culture that we’re building in this city,” when the company was booming.

Outcome’s demise left many Chicago business and tech leaders frustrated.

“It creates jobs, it makes people realize you can build big, interesting companies in Chicago,” said Ira Weiss, a clinical professor at the University of Chicago Booth School of Business, of when companies like Outcome succeed in Chicago. “With Outcome, it was very disappointing the way it played out for local people like myself who care a lot about the local entrepreneurial ecosystem.”