UBiomeA federal grand jury has charged the uBiome co-founders with multiple federal crimes, including two fraud charges, money laundering and more.

Now bankrupt, uBiome was founded by Zachary Apte, 36, and Jessica Richman, 46, in 2012 as a medical testing company that performed diagnostic analysis on fecal samples.

The company offered a direct-to-consumer service called “Gut Explorer,” which allowed an individual to submit a fecal sample to be analyzed by uBiome in its laboratory, after which the company would produce a report comparing the customer’s microbiome to the microbiomes of others who submitted samples. All the analysis and reporting was priced at less than $100 for the consumer.

Apte and Richman were charged with conspiracy to commit securities fraud, conspiracy to commit health care fraud, money laundering and related offenses connected to their alleged schemes to defraud health insurance providers and investors to raise capital for uBiome, according to a U.S. Dept. of Justice news release.

The duo was indicted on allegations that they had expanded uBiome’s business model to include the development and marketing of “clinical” tests regarding gut and vaginal microbiomes. Tests would be used by medical professionals to make decisions and uBiome would seek reimbursement from insurance providers that would reach up to nearly $3,000, according to the DOJ.

Allegedly, Apte and Richman aimed to develop “clinical” tests and bill insurance companies to attract large-scale investments. The company began to market its “clinical” version of a test just before raising millions in a Series B round. After beginning to market the test, the indictment alleges that the co-founders sought to secure healthcare provider orders for the tests by various methods, including having its chief medical officer review test requests from customers and building a network of providers outside of uBiome.

Allegedly, Apte and Richman adopted fraudulent practices surrounding the “clinical” tests by deceiving healthcare providers and reimbursing insurance providers regarding tests that were not validated and not medically necessary. The indictment also alleges that the defendants falsified documents and lied about concealed material facts when asked questions by insurance providers that would have revealed the fraudulent actions they had undertaken.

Included among the alleged practices is the fraudulent submission of reimbursing claims, utilizing a captive network of doctors and providers who were given partial and misleading information about the test requests under review, fraudulently submitting reimbursement claims for unvalidated tests, manipulating dates of service to hide actual practices and maximize billings, fraudulently not charging patients for patient responsibility and instead incentivizing them with gifts and then lying about such gifts, and finally falsifying documents.

Allegedly, between 2015 and 2019, uBiome submitted more than $300 million in reimbursement claims to private and public health insurers. From those claims, the company was paid more than $35 million.

In addition to those allegations, the indictment also alleges that Apte and Richman oversaw an effort to deceive and mislead investors, particularly with regard to the company’s business model in terms of revenues and reimbursement rates, as well as threats to future revenues thanks to the company’s failure to collect patient responsibility. The lack of clinical utility and acceptance in the medical community of the company’s test also played a role in the alleged deceit.

The indictment alleges that the duo managed to get investors to contribute more than $64 million in uBiome stock during its Series B and Series C financing rounds, with the co-founders allegedly selling investors more than $12 million of their personal stock during the rounds.

Finally, the defendants are also alleged to have engaged in aggravated identity theft through engaging in transactions with the proceeds of the alleged unlawful activities of wire fraud and securities fraud. The indictment alleges that Apte used more than $10,000 in proceeds from the scheme to defraud investors and make a $2.25 million payment to a law firm and deposit $500,000 in a bank account.

Additionally, Richman is alleged to have used more than $10,000 from the scheme to defraud investors and make payments related to property in Washington and Florida, while also allegedly purchasing an annuity from a life insurance company, paying a law firm $2 million for a legal retainer and transferring $900,000 as partial payment for a purchase of a residence in Florida.

“The innovation that emerges from our Bay Area companies is unparalleled, but all innovation must exist within the boundaries of the law,” acting U.S. Attorney Stephanie M. Hinds said in the DOJ release. Today’s indictment alleges that in their efforts to move fast to drive business and investment capital to their microbiome startup, defendants turned a blind eye to compliance and pursued at all costs a path designed to bring the greatest investment in their company. The indictment alleges defendants bilked insurance providers with fraudulent reimbursement requests, a practice that inevitably would result in higher premiums for us all.

“Further, defendants cashed out on the investment that flowed into the company to benefit themselves. Today’s indictment is a cautionary tale about the importance of robust compliance programs rather than lip service, and the importance of honesty with investors.”

“This was the result of a very complex investigation conducted by the FBI and our federal and state partners,” added FBI Special Agent in Charge Craig D. Fair. “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.”