uBiome Co-Founders Face Federal Fraud, Conspiracy Charges

The co-founders of uBiome face multiple federal charges connected with what prosecutors allege are schemes to defraud health insurance providers and investors in order to raise capital for their now-bankrupt microbiome testing company.

Zachary Schulz Apte, 36, and Jessica Sunshine Richman, PhD, 46, were charged Thursday with multiple federal crimes by the U.S. Attorney’s Office for the Northern District of California. The charges included conspiracy to commit securities fraud, conspiracy to commit health care fraud, money laundering, and related offenses, according to a 33-page indictment handed down by a federal grand jury.

“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,” Acting U.S. Attorney Stephanie M. Hinds said in a statement.

Separately, the U.S. Securities and Exchange Commission filed its own court complaint alleging that Apte and Richman defrauded investors of $60 million by falsely portraying uBiome as a successful startup with a proven business model and strong prospects for future growth.

Apte and Richman lived in San Francisco at the time the actions covered by the indictment were alleged to have been committed. In 2012 they co-founded uBiome, after raising $350,000 through a successful crowdfunding campaign via IndieGoGo.

The company initially offered a direct-to-consumer test called Explorer™, allowing users to submit fecal samples for lab analysis resulting in a report comparing customers’ microbiomes to those of other customers, for $89. By 2014, it grew to 5 employees and made CNN’s 2014 “CNN 10”  roundup of promising new startups.

Richman was CEO from the company’s launch until May 2018, when she became co-CEO with Apte, who was promoted from Chief Technology Officer. But by January 2019, uBiome laid off more than 50 of its 300 employees, and said it was shifting its focus to therapeutics development.

Three months later in April 2019, the U.S. Federal Bureau of Investigation (FBI) raided the company’s offices as part of their probe into the company’s billing practices. uBiome suspended clinical operations, Apte and Richman took leave from their positions, and uBiome filed for Chapter 11 bankruptcy protection from creditors in Delaware in September 2019—then a month later moved into Chapter 7 liquidation bankruptcy, shutting down operations.

Expanding Business Model

According to prosecutors, uBiome’s trouble started in 2015 when it expanded its business model to include development and marketing of what the company said were clinical tests regarding the gut and vaginal microbiomes—tests designed for use by clinicians, and for reimbursement of up to nearly $3,000 from payers. Apte and Richman sought to attract large-scale venture capital investment through uBiome’s efforts to develop those tests, which it began to market in late 2015, shortly before it raised its $22 million Series B financing.

Around that time, the indictment alleges, Apte and Richman directed uBiome to secure health care provider orders for its clinical gut test and clinical vaginal test, including by having its Chief Medical Officer review test requests from customers and working to build a network of health care providers that would use the test

According to the indictment, Apte and Richman drove business and investment capital to their microbiome startup by bilking insurance providers with fraudulent reimbursement requests, then cashing out on the investment that flowed into the company to benefit themselves.

“The innovation that emerges from our Bay Area companies is unparalleled, but all innovation must exist within the boundaries of the law,” Hinds stated.

Prosecutors allege that Apte and Richman developed, implemented, and oversaw practices designed to deceive approving health care providers and reimbursing insurance providers regarding tests that were not validated and not medically necessary. Apte and Richman then falsified documents and lied to insurance providers when they asked questions about uBiome’s billing model.

According to the indictment, those practices included:

• Lying about the success of uBiome’s business model based on revenues and reimbursement rates
• Fraudulently submitting reimbursement claims for re-tests or re-sequencings of archived samples, which uBiome referred to internally as “upgrades”
• Using a captive network of doctors and other health care providers who fraudulently were given partial and misleading information about the test requests they were reviewing
• Fraudulently submitting reimbursement claims for tests that had not been validated under CLIA and/or for which patient test results had not yet been released
• Manipulating dates of service to conceal uBiome’s actual testing and marketing practices from insurance providers, and to maximize billings
• 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; and
• Falsifying documents, using the identity of doctors and other health care providers without their knowledge or authorization, and 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.
• Failing to disclose the lack of clinical utility and acceptance by physicians of uBiome’s tests.

$300M in Claims

Between 2015 and 2019, federal prosecutors allege, uBiome submitted more than $300 million in reimbursement claims to private and public health insurers.  uBiome was paid more than $35 million on those claims, according to the indictment.

The indictment also accuses Apte and Richman of overseeing uBiome’s efforts to deceive and mislead investors during its $22 million Series B financing in 2016, and its $83 million Series C round two years later.

By then, uBiome’s commercial products also included:

• SmartGut™, which it marketed as the world’s first sequencing-based clinical microbiome test, designed to identify gut microbes for patients with chronic gut conditions such as inflammatory bowel disease (IBD), irritable bowel syndrome (IBS), Crohn’s disease, and ulcerative colitis.
• SmartJane™, marketed as the first sequencing-based women’s health screening test, designed to genotype all 19 clinically relevant strains of human papillomavirus (HPV), identify four common sexually transmitted diseases, and survey more than 20 vaginal microbes associated with bacterial vaginosis and other conditions.

According to the indictment, Apte and Richman induced investors to invest more than $64 million in uBiome stock during the Series B and Series C fundraising rounds, and together sold investors more than $12 million of their personal uBiome shares during those rounds.

The two co-founders are also alleged to have engaged in aggravated identity theft, wire fraud, and securities fraud through money laundering. The indictment said that Apte used more than $10,000 of proceeds from unlawful activities to defraud investors into making a $2.25 million payment ostensibly to a law firm for a retainer and to deposit $500,000 into a bank account.

Richman was accused of using more than $10,000 in proceeds to defraud investors to make payments related to real property in Washington State and Florida, to purchase an annuity from a life insurance company, to pay a law firm $2 million ostensibly for a legal retainer, and to transfer $900,000 intended as partial payment for the purchase of a home in south Florida.

Initial court appearances for Apte and Richman had yet to be scheduled at deadline.

“[Thursday’s] indictment is a cautionary tale about the importance of robust compliance programs rather than lip service, and the importance of honesty with investors,” Hinds added.