Outcome Health's Investors Receive U.S. Subpoenas -- WSJ

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (November 10, 2017).

Investors in Outcome Health on Thursday said in a court filing that they were receiving subpoenas from the Justice Department as part of a fraud investigation into the prominent Chicago advertising startup.

The filing, submitted to the New York State Supreme Court in New York County, said Goldman Sachs Group Inc. and other investors, which are suing Outcome for allegedly defrauding them, were receiving the subpoenas on Thursday. The investors also said "additional inquiries" were expected from the Securities and Exchange Commission, without elaborating.

Goldman Sachs was notified by the Justice Department that it would be receiving a subpoena, a person familiar with the matter said. This person said the SEC told Goldman it would soon send investors a formal request for information.

Representatives of the Justice Department and SEC declined to comment.

An attorney for Outcome Health, Sanford Michelman of Michelman & Robinson, said the company "is committed to fully cooperating with any government investigation."

"The company hired former U.S. Attorney Dan Webb of Winston & Strawn to lead its review as soon as it learned of these potential issues with certain employees and that internal review is under way," he said.

One of Outcome's pharmaceutical-advertising customers also received a Justice Department subpoena requesting data related to ad campaigns, according to a person familiar with the matter.

The subpoena to this company requests a list of documents including those related to locations where Outcome said it displayed ads, information on any possible discrepancies with those locations and on refunds provided to the company from Outcome, and any reports showing the effects of the advertising, this person said.

Outcome, which streams drug advertising to flat screens and tables it places in doctors' offices, earlier this year raised nearly $500 million in funding that it said investors valued the company at $5.5 billion. Goldman Sachs invested $100 million of client money through its asset-management arm.

Last month, The Wall Street Journal reported that some Outcome employees had allegedly misled pharmaceutical-advertising customers. Outcome charged some advertisers for ad placements on more screens than the startup had installed, the Journal reported, citing information provided by former employees and advertisers as well as internal documents and other material.

Some Outcome employees also provided customers with inflated data to measure how well ads performed, created documents that inaccurately verified that ads ran on certain doctors' screens, and manipulated third-party analyses showing the effectiveness of the ads, according to some of these people and documents.

In response to that article, Outcome said it "has always upheld the highest ethical standards" and has adopted new policies throughout 2017 to comply with customer contracts. The company put three employees on paid leave while Mr. Webb reviews allegations of misconduct.

On Tuesday, funds managed by an investment unit of Goldman Sachs, Google parent Alphabet Inc. and other firms sued Outcome and its founders, Rishi Shah and Shradha Agarwal, claiming fraud and breach of contract. The lawsuit, which cites the Journal article and information gathered by the investors, alleges the founders misled them by knowingly providing false data and financial reports before the firms invested $478.5 million beginning in March. The suit also seeks to freeze $225 million in funds controlled by the founders.

Outcome on Wednesday said that the investors' accusations were baseless and that their effort to freeze the funds was unfair and could financially damage the company.

In Thursday's filing, the investors provided information that they allege shows Outcome manipulated third-party reports summarizing ad campaigns to make them appear to be more successful than they were.

Kenneth Eberts, a managing director at Goldman Sachs who sits on Outcome's board, stated in an affidavit attached to Thursday's court filing that funds managed by Goldman relied on those case studies when conducting due diligence before making its $100 million investment earlier this year. Mr. Eberts said Outcome told Goldman the case studies were prepared by a research firm called IMS Health, which is now part of a company called IQVIA.

IMS has previously that, "We expect clients to use our data in a responsible and appropriate manner."

Representatives of the Goldman funds met last week with Outcome employees to review 28 case studies it had received during the due-diligence process to "cross-check" the raw data from IMS underlying the studies, according to the affidavit.

The affidavit said that Outcome was able to provide the underlying IMS data for 21 of the 28 case studies, and that 10 of those 21 contained manipulated data to make the ad campaign in question appear more successful than the raw IMS data showed. Each of those 10 studies misreported the customers' return on investment, and nine of them overstated the number of doctors' offices that ran drug ads, Mr. Eberts' affidavit said.

Mr. Eberts stated that Outcome wasn't able to review data for seven reports because the employees said they couldn't find the data.

In response to a request for comment on the affidavit, Outcome said it "is committed to integrity and transparency" and that is why it hired Mr. Webb to conduct the independent review.

"The board has been provided ongoing updates of this review process," it said.

Write to Rolfe Winkler at rolfe.winkler@wsj.com

(END) Dow Jones Newswires

November 10, 2017 02:47 ET (07:47 GMT)