In today's Finshots, we tell you how Outcome Health's fake billionaire founders pulled off a real business scam.

The Story

In 2017, Rishi Shah made it to the Forbes 400 list of the richest Americans, and he had all the right reasons to be there.

He boasted a net worth of $3.6 billion and was the co-founder of Outcome Health, a $5 billion advertising technology startup — a shining beacon in Chicago’s startup scene. That’s not all. He and his business partner, Shradha Agarwal, were featured in Fortune’s 40 Under 40 too.

But later that same year, things took a dark turn. Big-name investors filed a lawsuit against Outcome, alleging that Shah and his unicorn startup had secured $500 million from them under false pretences and fraud. They wanted their money back.

Now, these weren’t just any investors; they were heavyweights like Goldman Sachs, Alphabet’s investment arm CapitalG and Pritzker. Their allegations were serious. And what began as a single investigation snowballed into a full-blown exposé. To the shock of many, the allegations proved to be true.

Over the years, Shah and his associates orchestrated a grand deception, duping investors and countless clients with a fraudulent scheme valued at a staggering billion dollars. And last week, justice was served as a US court handed down a lengthy prison sentence to the perpetrators of this elaborate con.

How did they pull it off, you ask?

Well, let’s take it from the top.

In 2005, Shah and Agarwal, while still undergraduates at Northwestern University in Chicago, launched a business publication called the Northwestern Business Review. Writing articles introduced them to a lot of people with innovative businesses and ideas. And they realised that there was a huge gap in the market for educating patients with chronic lifestyle diseases like type 2 diabetes, obesity or heart diseases.

They grabbed the opportunity a year later and kicked off Context Media, a digital platform that helped pharmaceutical companies deliver targeted advertisements directly to patients.

The idea was straightforward. Context Media would run ads on TV screens and tablets installed (free of charge) in doctors' clinics. These ads would come from pharmaceutical companies who’d choose which doctors and patients they wanted to target. For context, if you’re a company that makes drugs for high blood pressure, you’d want to place your advertisements in a cardiologist’s office. Context Media on the other hand would have its own list of doctors and clinics where screens were installed. It would then match the request with this list and charge advertisers based on how many places they ran these ads.

And if that sounds like a unique business model, you’re not alone. Advertisers were intrigued too. They increasingly approached Context Media to reach their target audiences effectively. And by 2012, Context Media’s business was booming. It expanded to 2,200 hospital waiting rooms and clinics, generating an impressive $20 million in annual revenue.

But that wasn’t enough for Shah and Agarwal who had grand ambitions. They wanted to increase revenues fivefold within the next five years.

Now, that wouldn’t happen magically, would it? They needed big clients willing to pay top dollar. And thus began their strategy of 'fake it till you make it.'

And to do that, they began inflating sales. To put things in perspective, between 2014 and 2016, Context Media frequently overcharged companies — sometimes by as much as double, by claiming to run ads on more screens than were actually installed.

Sure, they would share the number of doctors and screens with their advertiser clients. But verifying their claims would be hard sometimes. They’d occasionally refuse to disclose a complete list of matched doctors, citing privacy concerns. And this hindered advertisers from independently confirming whether their ads were really running.

If clients became highly sceptical and asked for proof, Context Media had a solution. Employees would take screenshots of ads from their own computers. They would edit these screenshots to add fake timestamps and doctor identification numbers, making them appear genuine. Then, they would share these doctored images with clients to assure them that everything was fine.

To make things more believable, they also inflated data to show better ad performance. All they had to do was show that more people interacted with the ads by clicking on the ones displayed on interactive tablet screens.

They also had something called a “make goods” policy. This assured clients that they'd make up for any shortfall in ad impressions or clicks in the next ad campaign.

That’s precisely how Context Media gained popularity. They even got a makeover, changed their name to Outcome Health (Outcome), acquired rivals and said bold things like “90% of clients who spend over $500,000 per year renew with our company.” So bigger clients naturally came pouring in. Outcome was now dealing with folks like Pfizer and Novo Nordisk.

But that was probably the beginning of the end because that's precisely when the lies began to unravel. Johnson & Johnson for instance complained to Outcome after its field representatives noticed there were no screens in some offices where the pharma giant was being charged for ads. Pfizer noticed that it wasn’t earning any meaningful returns from these ad campaigns and demanded a full refund of $4 million.

These tip offs were enough to attract media attention. Publications began blowing the whistle on Outcome’s nefarious acts. They revealed how the company had falsified performance metrics and inflated numbers to fabricate sales. These deceptive practices helped them raise nearly $900 million from investors and lenders.

And that’s how investors came to realise that they were practically sitting on worthless investments in a company built on lies.

Last year the US Department of Justice confirmed their fears.

Trials revealed that Outcome’s fake scheme began targeting clients in 2011, lasted until 2017, and resulted in at least $45 million of overbilled advertising services ― enough to rake in more investments and financial backing, which helped fund Shah and Agarwal’s expensive billionaire lives.

And that folks, is how they managed to pull off one of the biggest frauds in the history of startups.

Until next time…

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