Investors in Outcome Health, including a fund co-founded by gubernatorial candidate J.B. Pritzker and units of Goldman Sachs and Google, have sued the Chicago health information and advertising startup and two of its founders, alleging they committed fraud to secure almost $500 million in funding earlier this year.
Outcome Health — considered among Chicago’s most promising tech startups after it launched in 2006 while CEO Rishi Shah and President Shradha Agarwal were students at Northwestern University — delivers pharmaceutical ads to patients on screens it places in doctors’ offices. The screens, free to doctors, show educational programming.
The lawsuit, filed Tuesday in state court in New York against Outcome Health, Shah and Agarwal, follows a Wall Street Journal report last month that said some employees charged pharmaceutical companies for ads on more video screens than the company had installed.
The investors, which include funds managed by Goldman Sachs Group, Chicago-based Pritzker Group Venture Capital, Google’s parent Alphabet and others, allege in the suit that Outcome Health misled them. Had they “known the truth about … Outcome Health, they never would have made their investments,” the investors allege. “Plaintiffs now hold securities that may be worthless.”
The $487.5 million investment included $100 million from a Goldman Sachs-managed fund and $50 million each from Pritzker’s fund, a fund tied to Alphabet and one affiliated with Emerson Collective, an organization run by Laurene Powell Jobs, according to the suit. The funding was Outcome Health’s first round of outside venture capital. It valued the company at about $5.5 billion and landed Shah on the Forbes 400 ranking of the richest Americans, with an estimated net worth of $3.6 billion.
After the Journal’s story was published, the Goldman Sachs-managed fund moved to investigate the claims and learned that Outcome Health “had presented fraudulent and false information” to encourage the funds to make their investments, the suit alleges.
The lawsuit alleges one count each of fraud, breach of contract, negligent misrepresentation, aiding and abetting, and rescission against the defendants.
Goldman, Emerson and Alphabet’s CapitalG declined to comment Wednesday. Pritzker Group did not respond to requests for comment.
Pritzker Group made its $50 million investment in Outcome Health in March, according to the lawsuit. Galia Slayen, a spokeswoman for the Pritzker campaign, said J.B. Pritzker stepped down as managing partner that same month.
The investors asked the court to award damages and require Shah, Agarwal and Outcome Health to return their investments in exchange for tendering their shares.
Of the $487.5 million, $225 million was to be distributed to Shah and Agarwal, according to the suit. That portion was to be held in Gravitas, a subsidiary of Outcome Holdings.
The suit alleges that Shah took steps to move funds after the Journal report, and it asks the court to order that those funds remain available.
A court document Outcome Health filed Wednesday asserts that those funds have not been moved. It also states that Shah and Agarwal have considered using a portion of that $225 million to pay down the company debt “and otherwise stabilize the business.”
In a statement provided to the Tribune late Tuesday by company spokesman John Eddy, Shah and Agarwal called the lawsuit a “money grab” that “simply is inexcusable and disappointing.”
“We had the right to take out this money, and we did not,” they said in the statement. “Instead, we decided to make the funds available for the company’s continued growth towards its mission. Goldman Sachs’s strong-arm Wall Street tactics are especially outrageous given these investors are well aware that both of us have always conducted ourselves with complete integrity and transparency.”
Sanford Michelman, an attorney for Outcome Health, also said in a statement that the lawsuit’s claims have no merit.
Recently, a number of major advertisers and agencies said they pulled tens of millions of dollars in ads from Outcome Health, and a top executive resigned from the company.
Since the Journal story, the company has denied routinely misreporting information to customers and has placed three employees on leave. It hired former U.S. Attorney Dan Webb to conduct an internal review of the allegations. It also said it is reviewing more than 250 ad campaigns that ran on its network this year and plans to turn files over to a third-party auditor for independent verification.
According to a court document filed Wednesday by a lawyer representing Shah and Agarwal, Webb participated in a conference call Monday regarding the investigation.
Though the inquiry is ongoing, the court filing says Webb told participants in the call that he has searched through emails and other documents — including those belonging to Shah and Agarwal — and conducted more than a dozen interviews. He said he had not found any evidence that senior management, including Shah and Agarwal, were involved in or aware of misconduct, according to the filing.
Michael Carlinsky, a New York-based attorney representing Shah and Agarwal, said that in light of that conference call, the lawsuit is “irresponsible and an unjustified attack on the reputations of the founders.”
A hearing on the case is scheduled for Monday.
Twitter @AllyMarotti
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