IVY Innovator Technology Awards, Presented By Cadillac
IVY Innovator Technology Awards, Presented By Cadillac

Inside founders’ epic $60m downfall

An American couple who founded a multimillion-dollar medical startup have been hit with multiple charges as their health empire crumbles.

Jessica Richmand and Zachary Apte co-founded the firm uBiome, but the spouses have recently been accused of fraud amounting to $US60 million ($A78 million) by the US Security and Exchange Commission (SEC), which said they used deceptive practices to misrepresent how well the company was performing.

It has also been claimed that the couple are currently fugitives as they face decades in prison.

"We allege that Richman and Apte touted uBiome as a successful and fast-growing biotech pioneer while hiding the fact that the company's purported success depended on deceit," said Erin Schneider, the director of the SEC's San Francisco regional office.

The company tested poo samples for different conditions related to gut health, portraying a reliable level of income from health insurance reimbursements for its the tests.

But the SEC didn't hold back, alleging that "uBiome's purported success in generating revenue, however, was a sham".

The SEC claims that uBiome duped a network of doctors into ordering unnecessary tests.

It also alleges that uBiome tricked insurers into paying for tests that weren't medically necessary or properly vetted by medical regulators.

The husband and wife were investigated by the FBI, which raided the company in April 2019, and are also facing criminal charges in California.

The charges against the San Francisco couple include conspiracy to commit securities fraud and health care fraud, as well as money laundering.

RELATED:Disgraced Theranos founder Elizabeth Holmes delays trial

 

 

WHAT IS UBIOME?

Launched in October 2012, it got its initial backing in an unusual way for a biotech start up - via a Kickstarter campaign as it sold itself as a citizen science project. They encouraged volunteers to submit poo samples to better understand the microbiome, which they called the "forgotten organ". The microbiome is the bacteria and other microorganisms contained in the digestive tract.

Initially, uBiome offered a direct-to-consumer service, called Gut Explorer, where an individual could take an at-home test that cost less than $US100 ($A129). People could submit a poo sample to be analysed, which would be compared to other gut microbiomes in the database. A report would then be provided to the customer, which they claimed could be used to improve health.

Ms Richmand, 36, and Mr Apte, 46, then expanded uBiome's business model to include development and marketing of "clinical" tests regarding the gut and vaginal microbiomes. These tests would be used by doctors to make medical decisions and uBiome would seek reimbursement from health insurance providers in amounts up to nearly $US3000 ($A3900).

Ms Richman was the chief executive officer and Ms Apte was the chief scientific officer of uBiome.

WHAT DID THEY PROMISE?

The success of the Kickstarter campaign led to investment from Silicon Valley firms.

But the SEC alleges that Mr Apte's and Ms Richman's efforts to have uBiome develop clinical tests that could be billed to insurance companies were intended to attract large-scale venture capital investment - despite the lack of medical credibility.

The last round of funding in September 2018 saw the company valued at nearly $US600 ($A776 million) million and uBiome also made it onto Forbes' Next Billion Dollar Startup list, after claims its annual revenue topped $US100 million ($A130 million). Overall, its reported the company took in $US105 million ($A136 million) from investors over the years.

RELATED:Elizabeth Holmes reportedly can't pay lawyers' fees

Zachary Apte, co founder of uBiome, is being chased by authorities. Picture: Supplied
Zachary Apte, co founder of uBiome, is being chased by authorities. Picture: Supplied

 

WHAT CAUSED THEIR DOWNFALL?

Health insurance companies got suspicious and by April 2019 at least 18 insurers were sending letters to the company about the billing practices. The company had submitted more than $US300 million ($A388 million) in claims to insurers between 2015 and 2019, receiving more than $US35 million ($A45 million) in payments.

The SEC claims that uBiome submitted fake chart notes purportedly from doctors to justify the tests.

It also alleges that the uBiome founders duped doctors into ordering tests by building a portal that connected patients with doctors who could order the test. The catch? The SEC alleged that the portal was designed to get doctor's to order two medical tests uBiome offered and then prescribe based on an online question form only.

The US authority claimed that uBiome tricked doctors into retesting old samples by telling consumers there was newer version of the uBiome test - increasing its number of billable claims - but all while using an existing sample.

Once the insurers discovered the "scam" they started to "claw back" previous reimbursement payments, according to the SEC, which alleges the couple "had to falsify documents and lie to insurance providers to attempt to keep them at bay".

WHO KNEW WHAT WAS GOING ON?

The board and general counsel at uBiome were unaware of Mr Apte and Ms Richman's alleged illegal behaviour, according to the SEC, and the founders directed its own employees "to provide insurers with backdated and misleading medical records to substantiate the company's prior claims for reimbursement".

When the pair pushed for more funding in September 2018 they concealed its billing issues with insurers from investors, claimed the SEC, and falsely stated that the existing insurance billing codes covered uBiome's tests.

RELATED: Theranos founder Elizabeth Holmes weds hotel heir

A screenshot from the now defunct company’s website uBiome. Picture: Supplied
A screenshot from the now defunct company’s website uBiome. Picture: Supplied

 

WHAT HAPPENED TO THE COMPANY?

In 2019 after the FBI raid broke down the doors of its San Fransisco headquarters, the company's board of directors launched an investigation with many in leadership roles departing by June. In July that year the couple resigned as co-CEOs of uBiome, before the company came crashing down in October. It filed for bankruptcy before shutting down and having its assets sold off.

WHAT HAPPENED TO THE MONEY?

In terms of money laundering, the SEC alleges Mr Apte used more than $US10,000 ($A13,000) to retain a law firm, while $US500,000 ($A647 million) was put in a bank account.

With Ms Richman, its claimed that used more than $US10,000 ($A13,000) to make payments related to real property in Washington and Florida, to purchase life insurance and to retain a law firm. She also transferred $US900,000 ($A1.2 million) in funds as partial payment for the purchase of a residence in south Florida.

The SEC also claims that Mr Apte and Ms Richman induced investors to invest more than $US64 million ($A83 million) in fundraising rounds and together sold investors more than $US12 million ($A15 million) of their personal uBiome during those rounds.

 

 

 

WHAT ARE THE SIMILARITIES TO THERANOS?

Elizabeth Holmes became America's youngest female billionaire after founding what was seemingly a groundbreaking biotech company, Theranos, when she was just 19 years old in 2003.

With a well-publicised phobia of needles, Holmes claimed Theranos had developed blood tests that only needed a small amount of blood from a fingerprick instead of a needle and at its peak was valued at nearly $US10 billion ($A14 billion).

The company secured a $A450 million deal with US pharmacy chain Safeway in 2012, with another lucrative deal with Walgreens a year later.

Reports that Theranos had been generating false and unreliable results began circulating and Wall Street Journal reporter John Carreyrou began investigating the company.

 

 

 

In 2018 he would author the book Bad Blood: Secrets and Lies in a Silicon Valley Startup, with Jennifer Lawrence slated to play the notorious businesswoman in an upcoming film adaptation.

In September 2018, Theranos was shut down for good, and today, its founder is facing trial on multiple federal charges of fraud which could result in a possible 20-year prison sentence and $2.75 million in fines.

She is accused of defrauding more than $A900 million from high-profile investors including Rupert Murdoch, the Walton family - founders of Walmart - and tech billionaire Larry Ellison. She continues to maintain her innocence.

WHAT COULD HAPPEN TO THE UBIOME COUPLE?

Acting US Attorney Stephanie Hinds warned that the charges were "a cautionary tale about the importance of robust compliance programs rather than lip service, and the importance of honesty with investors."

The SEC is calling on the court to force Ms Richman and Mr Apte to return investor's money with interest and pay additional criminal penalties.

It also wants them barred from boardrooms. It's asked for the court bar both of them from serving as an officer of publically traded company and from buying or selling shares except from their own personal accounts.

"Investors are entitled to know the material risks of the companies they are investing in, no matter how transformative those companies claim to be," said Ms Schneider.

 

 

Originally published as Inside founders' epic $60m downfall


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