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Startup Sold DNA Kits to Test Poop. Prosecutors Say It’s a Fraud

(Bloomberg) — The founders of medical testing company uBiome Inc. were criminally charged with a $60 million fraud in an alleged scheme that reads like a smaller-scale, lower-profile version of the spectacular collapse of Theranos Inc.Offering products that allowed consumers and patients to analyze the DNA of their own microbiomes from fecal samples, uBiome filed for bankruptcy in September 2019, about four months after the FBI began investing its billing practices. Among its creditors were high-profile venture capital firms 8VC and Andreessen Horowitz.Now, its former chief executives, Jessica Richman, 46, and Zachary Apte, 36, face charges of securities fraud and health-care fraud that could send them to prison for 20 years, along with a suit by the U.S. Securities and Exchange Commission.The cases echo the criminal charges pending against Theranos Inc. founder Elizabeth Holmes and her onetime boyfriend and former Theranos President Ramesh “Sunny” Balwani.There’s one important difference: While Holmes and Balwani are heading to trial to defend themselves, prosecutors say Richman and Apte are fugitives.“The defendants’ initial federal court appearances have not yet been scheduled,” the U.S. attorney’s office in San Francisco said in a statement Thursday.Like Holmes and Balwani, Richman and Apte worked closely together and were romantically involved — leading them to marry in 2019, according to the SEC.In another parallel, both sets of defendants are charged with telling investors their companies could perform reliable medical tests when, according to prosecutors, they couldn’t.Ultimately, though, the alleged fraud at Theranos was on a much grander scale: Richman and Apte’s startup was valued at $600 million in one series of fundraising, compared with $9 billion for Theranos at its height.The Spectacular Rise and Fall of Elizabeth Holmes and TheranosRichman and Apte “painted a false picture of uBiome as a rapidly growing company with a strong track record of reliable revenue through health insurance reimbursements for its tests,” the SEC said in its complaint. “uBiome’s purported success in generating revenue, however, was a sham.”Initially, uBiome’s “Gut Explorer” test was offered to perform genetic sequencing from fecal samples and marketed as a way to get a better understanding of what was going on in one’s gut, according to the indictment. By 2014, Richman and Apte concluded the company couldn’t generate enough revenue to attract venture capital investors, so turned to marketing clinical tests used to make medical decisions, according to the government.Ubiome submitted health insurance claims for its tests, ultimately marketed as “SmartGut,” to private insurers providing coverage to Medicare beneficiaries as well as private-sector employer-sponsored health plans, according to the indictment.Among other practices, Richman and Apte deceived health care providers and insurers by submitting fraudulent reimbursement claims for re-tests, relying on a “captive network” of health care providers to whom they gave partial and misleading information, and manipulating dates of service to conceal uBiome’s real testing and marketing practices, prosecutors said.The company founders relied on the scheme from 2015 to 2019 to sell uBiome stock and debt to pay for operations and enrich themselves, prosecutors said. The indictment describes a series of investment rounds by various funds not identified by name.Read More: uBiome Estate Donating 40k Covid-19 Testing Kits to HospitalSan Francisco-based 8VC and Menlo Park, California-based Andreessen Horowitz hold a 22% and 10% stake in uBiome, respectively, court documents show.8VC led an early, $17 million fundraising round and participated with 10 other investment firms in an $83 million, later-stage round, while Andreessen Horowitz took part in another early-stage, $4.5 million round, according to market data provider PitchBook. Y Combinator, based in Mountain View, California, and Tokyo-based Dentsu Ventures are among other uBiome investors listed by PitchBook.”We are grateful to the authorities and will continue to fully cooperate with them,” 8VC said in a statement. “We cannot comment any further on an ongoing case.”Y Combinator declined to comment while Andreessen Horowitz and Dentsu Ventures didn’t respond to requests for comment.Richman and Apte didn’t tell investors tell that insurer questions about uBiome’s billing practices called the company’s “entire business model into question,” but that the founders “had to falsify documents and lie to insurance providers in order to attempt to keep them at bay,” according to the indictment.Richman and Apte couldn’t be located for comment. Spokespersons for the U.S. attorney’s office and the San Francisco office of the FBI didn’t immediately respond to requests for comment.The criminal case is U.S. v. Apte, 21-cr-0116, U.S. District Court, Northern District of California (San Francisco).(An earlier version of this story corrected the participation by 8VC and Andreessen Horowitz in fundraising)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.

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