{"id":9688,"date":"2023-07-12T11:15:24","slug":"5-fraudulent-modus-operandis-that-investors-must-be-aware-of","title":{"rendered":"5 fraudulent modus operandis that investors must be aware of"},"content":{"rendered":"

\"fraudulentWith the rise of numerous business startups in recent times, there are now more opportunities for investors to grow their capital. By investing in these startups, investors aim to earn substantial passive income.<\/span><\/p>\n

But nothing in this world is <\/span>that<\/span><\/i> easy. Before making an investment, investors need to ensure that their funds are going to the right companies and must steer clear of fraudulent schemes. Losses due to investment fraud, as in the case of Outcome Health, should be anticipated and prevented at the outset.<\/span><\/p>\n

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Lessons learned from Outcome Health\u00a0<\/b><\/h3>\n

Outcome Health was a healthcare technology company that provided digital advertising solutions in medical waiting rooms. In 2017, the company was valued at $5.5 billion and was considered one of the fastest-growing startups in Chicago. However, in 2017, Outcome Health was accused of fraud.<\/span><\/p>\n

The fraud allegations came to light after a Wall Street Journal investigation, which discovered that Outcome Health had lied to advertisers about the number of screens showing their commercials. Significantly, this fraudulent investment took a toll on some prominent investors, including Goldman Sachs, as well as Alphabet\u2019s GV, Balyasny Asset Management, and CapitalG.<\/span><\/p>\n

After 10 weeks of trials, a federal jury finally convicted three former Outcome Health executives\u2014former co-founders Rishi Shah and Shradha Agarwal and former chief operating officer and chief financial officer, Brad Purdy\u2014for their roles in fraudulent schemes of up to $1 billion.<\/span><\/p>\n

Fabricated financial reports<\/b><\/h3>\n

Based on the results of an intensive search, it was uncovered that the modus operandi of fraud carried out by the company was the falsification of financial reports. Such fraudulent financial reporting has severe consequences for companies and investors, leading to financial loss, legal action, and reputational damage.<\/span><\/p>\n

There are <\/span>several methods<\/span><\/a> that are generally used in falsifying financial reports, including:<\/span><\/p>\n

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  1. Overstating income or assets.<\/b><\/li>\n<\/ol>\n

    This method was used by the defendants in the Outcome Health case. According to the Justice Department, Purdy inflated the earning figures to attract investors.<\/span><\/p>\n

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    1. Understating expenses or obligations.<\/b><\/li>\n<\/ol>\n

      This method is usually carried out by not recording expenses or obligations, such as unpaid debts or taxes, thereby making the company’s financial position appear stronger than it really is.<\/span><\/p>\n

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      1. Manipulating reserves or allowances.<\/b><\/li>\n<\/ol>\n

        Misusing reserve funds or allowances set aside to cover potential losses or expenses.<\/span><\/p>\n

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        1. Improper disclosure.<\/b><\/li>\n<\/ol>\n

          This is when the report does not disclose important information, such as related party transactions, significant changes in accounting policies, or other events that could affect the company’s financial position.<\/span><\/p>\n

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          1. <\/b>Channel stuffing<\/b><\/a>.<\/b><\/li>\n<\/ol>\n

            Shipment of products in excessive quantities to distributors or customers at the end of the reporting period to increase sales figures, thereby giving the impression that the company’s performance is better than it really is.<\/span><\/p>\n

            Poor due diligence\u00a0<\/b><\/h3>\n

            The Outcome Health case is not the only fraud case that took a toll on prominent investors. Many other cases, including the <\/span>Theranos<\/span><\/a>, <\/span>Wirecard<\/span><\/a>, <\/span>FTX<\/span><\/a>, and <\/span>Frank cases<\/span><\/a>, serve as constant reminders that even prominent investors can be susceptible to fraudulent investments and highlight the importance of performing thorough due diligence.<\/span><\/p>\n

            Learning from the cases, some of the factors that may have contributed to the failure of due diligence by prominent investors include:<\/span><\/p>\n