Outcome Health fraud trial: Star witness Ashik Desai testifies

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This week, they’re all in a Chicago courtroom. Shah, Agarwal and Desai’s former boss, Brad Purdy, are charged with fraud. Desai has pleaded guilty to fraud and agreed to become the prosecution’s star witness in hopes of seeing his sentence cut in half to 10 years or less. He’s also key to the defendants’ hopes for an acquittal. They contend Desai was a rogue employee who faked studies about the effectiveness of Outcome advertising without telling his bosses.

Outcome Health was one of Chicago’s most high-profile startups, raising nearly $500 million from investors that included Goldman Sachs, Gov. J.B. Pritzker’s former venture capital fund and Google. It briefly was valued at more than $5 billion before fraud allegations surfaced, hobbling the company, which soon was sold to a competitor for an undisclosed price.

The trial has been closely watched by the startup community, as much for what it reveals about Outcome Health’s well-known founders as where the line is between the practice of faking it till you make it and criminal fraud.

In two days on the witness stand, Desai has calmly and methodically described how Outcome routinely overcharged clients, detailing instances when a drug company was billed in full even when there were no ads running, as well as close calls in which customers nearly found out the company was lying to them.

Desai described how the company was doing business in 2014 with AbbVie for one of its biggest products, arthritis drug Humira, while also doing business with a competitor, Pfizer’s Xeljanz. It didn’t have enough inventory for either drug, so it shifted some screens that were running Humira ads to Xeljanz without telling either client. AbbVie was one of Outcome’s top customers, spending more than $3 million a year.

He also detailed how Outcome oversold inventory to Boehringer Ingelheim, which made a blood-clot drug called Pradaxa. In 2013, the drug maker was Outcome’s largest client, paying $220,000 a month to run ads in 1,800 offices. Outcome Health never delivered ads to nearly that many offices but didn’t disclose it to the client. 

Early on, Boehringer wanted to do its own research study on the performance of the ads, requesting a list of offices where their ads were running. Such a list would have exposed that Outcome was selling offices it didn’t have.

In an email, Desai told a colleague: “In the end, we’re open to being honest if it’s caught, but given the lack of communication between the research and brand teams, I think this will be highly unlikely.”

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Emails detailed the scramble that ensued, involving Shah. The company dodged the bullet because of a hiatus in the ads by the advertiser meant the campaign had run long enough for a performance study.
 
Another problem arose when salespeople from Johnson & Johnson visited doctors’ offices in Michigan to find that their ads weren’t running in them or that the TVs were playing a competitor’s campaign. Outcome was at risk of losing the client but kept the business by providing free ads, or “make-goods,” to make up for the shortfall.
 
When assistant U.S. attorney Matt Madden asked him why he and the company didn’t tell the truth, Desai said, “Because that wasn’t the business practice at Outcome. … I always thought we were going to get there. I believed it was all going to kind of work out.”

That didn’t happen. In 2017, one of Desai’s colleagues told the Wall Street Journal about the problems, triggering investigations by the Dept. of Justice and Securities and Exchange Commission.

As Outcome Health grew, from $15 million in sales when Desai started to $125 million by 2016, the practice of selling more inventory than it had was a persistent problem frequently discussed by top executives. On Christmas Eve 2016, Shah told Desai in a voice memo played for the jury, that “Purdy shared with me some grave concerns about our lack of ability to fulfill” contracts for the coming year.

Desai is expected to testify for another day, followed by up to a week of cross examination. 

This story first appeared in Crain’s Chicago Business.

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