After backing Outcome Health, an advertising company, Goldman Sachs Investment Partners (GS) and other investors are among those suing the startup for fraud and to get their money back. The lawsuit, filed a couple of months ago, comes in the wake of allegations that investors were fooled by inflated information financial performances and were charged for ad space that they never received. Outcome denies any wrongdoing.
It wasn’t too long ago that the company was generating high profits and revenue, while investors were told that their returns were guaranteed. Just last spring, institutional investors, including Goldman, infused $478M into the ad company, which streams pharmaceutical advertising onto tablets and flatscreens at doctor offices.
According to the Wall Street Journal, there had been red flags even back then. The newspaper noted how even the “savviest investors” can miss or ignore warnings. For example, Outcome already had a lot of debt, including $325M for a loan. It also lacked an independent board to conduct oversight and its co-founders were poised to make an “unusually large payout.”
Also, noted the WSJ, ex-Outcome employees and advertisers have claimed that the company sold ad placements on more screens than were actually available. Outcome Health made up for this by offering tens of millions of dollars in free ads last year. In 2016, a salesperson filed a whistleblower claim accusing the company of “ongoing fraud.”
Another risk that has been present since the beginning is the strategy employed by the founders Shradha Agarwal and Rishi Shah, which even they have admitted is risky. Outcome required money to place screens in doctor offices but couldn’t get advertisers to give them money unless the screens were already in place. According to Agarwal in a 2012 interview, she and Shah instead worked out “upfront payments” on advertising agreements so that there would be funds in the bank and the screen installations could be put in place. Shah, however, noted that both advertisers and doctors had to be buying from the company in a manner that was coordinated to such an extent that what Outcome was selling actually existed at the time of purchase because otherwise that would be fraud.
Goldman Sachs Investment Partners, as the lead investor in Outcome, invested $100 of its own clients’ funds in the ad company and brought in more investors. Other institutional investors in Outcome include: Pritzker Group, Alphabet’s Capital Group, Emerson Collective, and Norwest Venture Partners for $50M, respectively; Hamilton Lane for $40M; Leerink Transformation Partners for $26M; and Balyasny Asset Management for $20M.
The investors that are part of the complaint contend that they had no way of knowing that Outcome would allegedly modify case study numbers to enhance the actual effectiveness of the ads. That Outcome promised investors a 20% yearly return only made investing in the company more attractive. The plaintiffs believe that Outcome and its founders misled them with false information and figures.Now, they want their money back.
Institutional Investor Fraud Cases
At The SSEK Partners Group, we represent institutional investors, including financial firms and funds that have lost money due to fraud and negligence. Contact our securities law firm today to request your free case consultation to determine whether you have grounds for an institutional investor fraud claim.
Why Goldman and Pritzker Sank Millions Into a Startup Before Suing It for Fraud, WSJ, January 25, 2017
Alphabet and Goldman Sachs are suing adtech startup Outcome Health for alleged fraud, TechCrunch, November 9, 2017
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