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Prosecutors say the co-founders for microbiome start-up uBiome fraudulently raised investment capital and submitted false insurance claims
WHAT DO THE CASES AGAINST ELIZABETH HOLMES & uBIOME CO-FOUNDERS HAVE IN COMMON?
INTRODUCTION
The US Attorney’s Office has repeatedly noted recently that innovation must exist within the boundaries of the law. That’s because of the recent wave of fraud occurring in the name of technological innovation or scientific advancement. Innovation is not an excuse for criminal behavior.
Indeed, this is the very issue on trial in the case of Elizabeth Holmes and Theranos.
Note: Check out the Prison Professors blog for our ongoing series on the Elizabeth Holmes trial.
uBiome is one recent example. The nub of the Department of Justice’s problem with uBiome and its two co-founders is that:
“In their efforts to move fast to drive business and investment capital to their microbiome start-up, defendants turned a blind eye to compliance and pursued at all costs a path designed to bring the greatest investment in their company.”
Sounds familiar? Does the Elizabeth Holmes criminal fraud trial come to mind?
- Driving investment in the company at all costs?
- Moving too fast?
- Turning a blind eye to medical and legal compliance problems?
- A lab director who worked at both Theranos and uBiome?
Note: This last point about the lab director is something that Holmes’ defense lawyers want to tell the jury about in the ongoing trial, but the Judge has not allowed it so far. Adam Rosendorff, former lab director for Theranos and a witness for the prosecution in the Holmes criminal fraud trial, also worked for uBiome. Holmes’ lawyers want to impugn Rosendorff’s credibility by associating him with another troubled biotech company, i.e., uBiome.
DISCUSSION
In a March 2021 federal indictment, prosecutors allege that uBiome’s former co-CEOs Zachary Schulz Apte and Jessica Sunshine Richman defrauded health insurance providers and investors. Between 2015 and 2019, uBiome submitted more than $300 million in reimbursement claims to private and public health insurers and received more than $35 million.
The federal grand jury’s indictment charges Zachary Schulz Apte and Jessica Sunshine Richman with:
- conspiracy to commit securities fraud:
- conspiracy to commit health care fraud:
- money laundering: and
- additional related offenses.
These charges stem from their alleged schemes to defraud health insurance providers and investors.
Federal & State Agencies Involved
To show the breadth and scope of the government’s effort in the case, these are just some of the federal agencies that worked on the uBiome case:
- United States Attorney’s Office (USAO, DOJ)
- Federal Bureau of Investigation (FBI)
- U.S. Postal Inspection Service (USPIS)
- US Department of Health and Human Services Office of the Inspector General (HHS-OIG)
- Defense Criminal Investigative Service (DCIS) Western Field Office
- US Department of Veterans Affairs, Office of Inspector General (VA OIG)
- Amtrak Office of the Inspector General, and
- Office of Personnel Management Office of Inspector General (OPM-OIG).
This massive law enforcement effort also involved:
- US Department of Labor, Employee Benefits Security Administration;
- California Department of Justice Division of Medi-Cal Fraud & Elder Abuse;
- California Department of Insurance;
- San Francisco Regional Office of the Securities and Exchange Commission.
It appears that no stone was left unturned.
List of Specific Charges
In total, the uBiome co-founders face the following charges and potential penalties:
Conspiracy to Commit Health Care Fraud
(one count, each defendant)
18 USC § 1349
20 years
Health Care Fraud
(14 counts, each defendant)
18 USC § 1347
20 years
Aggravated Identity Theft and Aiding and Abetting
(six counts, each defendant)
18 U.S.C. § 1028A & 2
2 years, consecutive to underlying sentence due to enhancement statute
Conspiracy to Commit Wire Fraud and Securities Fraud
(one count, each defendant)
18 USC § 371
5 years
Wire Fraud and Aiding and Abetting
(10 counts, each defendant)
18 U.S.C. § 1343 & 2
20 years
Fraud in Connection with the Purchase and Sale of Securities
(9 counts, each defendant)
15 U.S.C. §§ 78j(b), 78ff;
17 C.F.R. § 240.10b-5;
18 USC § 2
20 years
Engaging in Monetary Transactions with Proceeds of Specified Unlawful Activity (Money Laundering)
(Apte, two counts; Richman, four counts)
18 USC § 1957
10 years
In addition to prison time, the court is likely to order supervised release, as well as monetary penalties and restitution. If convicted, any sentence the court imposes would consider the US Sentencing Guidelines and the federal statute governing the imposition of a sentence, 18 USC § 3553.
uBiome’s Story
According to the federal indictment, Apte and Richman, who co-founded uBiome in October 2012, committed massive fraud when raising investment capital for their company. They also committed fraud when developing their microbiome testing and billing practices.
Microbiome tests reveal the types and levels of bacteria and other microbes in a person’s large intestine.
One of uBiome’s first commercial offerings was a direct-to-consumer $100 service called “Gut Explorer.” Gut Explorer allowed customers to submit a fecal sample for laboratory analysis. uBiome’s service was to compare a customer’s results with those of other customers who had also submitted fecal samples. Eventually, uBiome’s business model included developing and marketing clinical tests regarding the gut and vaginal microbiomes that medical professionals could use to make medical decisions.
For revenue, uBiome sought reimbursement from health insurance providers of nearly $3,000.
The indictment alleges that the two co-founders became obsessed with developing clinical tests that could be billed to insurance companies at high numbers to attract large-scale venture capital investment.
For example, by late 2015, uBiome began to market a new version of a test to coincide with its planned capital raise of millions of dollars in its Series B fundraising round. Raising capital was or became the primary driver in the co-founders’ decision-making. They turned a blind eye to medical and legal compliance issues and pursued instead a path designed to bring the most significant investment dollars to their company at all costs.
DOJ alleges that, in the end, the two co-founders bilked insurance providers with fraudulent reimbursement requests. Further, the DOJ alleges that co-founders cashed out investor capital from the company to benefit themselves.
Specific Fraudulent Practices
According to the indictment, the co-founders developed, implemented, and oversaw practices designed to deceive health care providers and insurance providers about clinical tests that were not validated and not medically necessary.
The co-founders also falsified documents and lied when insurance providers asked questions.
Specifically, uBiome engaged in a long list of fraudulent practices in the course of its business:
(1) fraudulently submitting reimbursement claims for re-tests or uBiome “upgrades” (which sounds a bit like churning);
(2) utilizing a captive network of doctors and other health care providers and providing them with partial and misleading information;
(3) fraudulently submitting reimbursement claims for tests that had not been validated under applicable federal standards;
(4) manipulating dates of service to conceal uBiome’s actual testing and marketing practices from insurance providers and to maximize billings;
(5) fraudulently not charging patients for patient responsibility required by insurers, and instead, in some cases, incentivizing them with gift cards, and then making false or misleading statements about, or concealing, those practices from insurance providers;
(6) falsifying documents, using the identity of doctors and other health care providers without their knowledge or authorization; and
7) lying to insurance providers in response to requests for information, overpayment notifications, requests for recoupment of billings, denials of reimbursement requests, or audits investigating uBiome’s billing practices.
Like Elizabeth Holmes, uBiome’s two co-founders allegedly oversaw an effort to deceive and mislead investors about various aspects of uBiome’s business. For example, during its Series B and Series C fundraising rounds in 2016 and 2018.
Specific misleading statements to investors included:
(1) the success of uBiome’s business model in terms of revenues and reimbursement rates;
(2) the threats to future revenues uBiome faced; and
(3) uBiome’s tests did not have clinical utility and acceptance in the medical community.
Management did not apprise investors of insurance providers’ significant questions about uBiome’s billing practices and business model. During the Series B and Series C fundraising rounds, Apte and Richman induced investors to invest more than $64 million in uBiome stock. Moreover, during those rounds, Apte and Richman sold investors more than $12 million of their own uBiome shares.
Aggravated Identity Theft & Money Laundering
The indictment charges aggravated identity theft and money laundering (using the proceeds of unlawful activity).
The co-founders committed aggravated identity theft by using various healthcare providers’ names and personal information and uBiome customers’ personal information to create false documents submitted to health insurance companies. This was part of the scheme to defraud the insurance companies.
The co-founders committed money laundering by making a $2,250,000 payment to a law firm supposedly for a retainer, and by depositing $500,000 into a bank account. They also violated anti-money laundering laws by making payments for real estate in Washington State and Florida, purchasing an annuity from a life insurance company, and transferring $900,000 to purchase a residence in South Florida.
Law Enforcement Statements About the uBiome Indictment
Leaders from various agencies took turns expressing the significance of their efforts at the news conference announcing the uBiome indictment. Here is a sampling of what they had to say:
FBI Special Agent in Charge: “This was the result of a very complex investigation conducted by the FBI and our federal and state partners. This indictment illustrates that the heavily regulated healthcare industry does not lend itself to a ‘move fast and break things’ approach, but rather to an approach of compliance and accountability.”
USPIS Inspector in Charge: “The United States Postal Inspection Service has a long history of successfully investigating complex fraud cases. Anyone who engages in deceptive practices should know they will not go undetected and will be held accountable. The collaborative investigative work on this case conducted by Postal Inspectors, our law enforcement partners, and the United States Attorney’s Office illustrates our efforts to protect American consumers and businesses.”
VA OIG Special Agent in Charge: “This indictment demonstrates the VA OIG’s unwavering commitment to safeguard the integrity of the programs that support our nation’s veterans and their families.”
Amtrak OIG Special Agent in Charge: “We are very proud of this well-coordinated, joint effort—a true partnership between the US Attorney’s Office and multiple investigative agencies like Amtrak’s Office of Inspector General. Because of this joint effort and efforts like it, we continue to achieve success across the country in bringing justice to those who target Amtrak’s health care plan, its employees and their dependents.”
CONCLUSION
The uBiome indictment is an example of robust law enforcement cooperation across federal and state agencies.
This indictment also speaks to a federal law enforcement priority for which no stone is left unturned. Federal law enforcement is targeting investor fraud and demanding honesty with potential investors. This is a big issue in the Elizabeth Holmes trial, where Holmes raised close to $1 billion from investors for Theranos while lying about the state of its blood-testing technology.
Looking at the list of charges against the two uBiome co-founders, it appears that the DOJ is throwing the book at them in order to send a loud message and make them a cautionary tale.
There are evident similarities between the criminal cases against the uBiome co-founders Zachary Schulz Apte and Jessica Sunshine Richman and Theranos founder Elizabeth Holmes.
Follow the Prison Professors blog for ongoing analysis of the developments in the most significant criminal white-collar cases in the US.
