uBiome CEO Jessica Richman and chief scientific officer Zachary Apte have been charged with defrauding investors by the US Securities and Exchange Commission (SEC).
The agency alleges that the co-founders defrauded $60m from investors “by falsely portraying uBiome as a successful start-up with a proven business model and strong prospects for future growth”.
The SEC is seeking court orders including officer and director bars, barring the pair from buying or selling shares and forcing them to return their investors’ money plus interest, along with paying additional criminal penalties.
The US Attorney’s Office for the Northern District of California has also announced criminal charges against Richman and Apte.
uBiome was founded in 2012, kicking off via a Kickstarter campaign offering an at-home test to sequence the DNA of customers’ gut microbiome, data which purportedly could then be used to improve their health.
The success of the campaign led to investment by Silicon Valley venture firms such as 8VC and Andreessen Horowitz.
The company’s latest funding round, in September 2018, valued the company at nearly $600m.
According to the SEC’s complaint, Richman and Apte falsely portrayed the company as having a strong track record of receiving health insurance reimbursement for its clinical tests, which purportedly could detect microorganisms and assist in diagnosing disease.
The SEC fraud charge alleges that these claims were misleading as uBiome has success in generating revenue due to on improper business practices.
These included duping doctors into ordering unnecessary tests, which would have led to insurers refusing to reimburse the company if discovered.
SEC director Erin Schneider said: “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.
“Investors are entitled to know the material risks of the companies they are investing in, no matter how transformative those companies claim to be.”
The fraud charge alleges that the pair attempted to conceal their improper conduct from investors and insurers by directing uBiome employees to provide insurers with backdated and misleading medical records to substantiate the company’s prior claims for reimbursement.
These attempts ultimately unravelled, according to the claim, forcing uBiome to suspend its medical test business and enter backruptcy in October 2019.
In April of that year, uBiome’s offices were raided by the FBI, prompting an investigation by the company’s board of directors. Richman and Apte resigned as co-CEOs in July 2019.
According to the complaint, Richman and Apte each made millions through selling their own uBiome shares during the fraudulent fundraising round.