Core Summary

  • The U.S. Securities and Exchange Commission (SEC) charged three former executives of a defunct pharmacy startup with inflating revenue and fraudulently obtaining over $170 million from investors.
  • The SEC said on Thursday that the former CEO and former CFO of Medly Health Inc. provided current and potential investors with financial information that misrepresented the company's financial condition, based in part on "millions of dollars in fake prescriptions" recorded by the former head of pharmacy operations.
  • Medly was valued at $900 million after completing a Series C funding round in August 2022, but filed for bankruptcy protection in December of that year and ultimately sold all its assets for $19 million. Sheldon Pollock, Deputy Director of the SEC's New York Enforcement Division, said in a statement: "Startups that raise money from investors through deceptive practices remain a key focus of the Commission."

In-Depth Analysis

Since becoming SEC Chair in 2021, Gary Gensler has strengthened enforcement of securities laws, focusing on investor fraud, cyber-related misconduct, and violations such as misleading financial reporting and disclosures.

The agency said in March that it plans to open 967 investigations in fiscal year 2025, a 5% increase from fiscal year 2023. The SEC also requested congressional approval of an $812 million enforcement budget for fiscal year 2025, an 18% increase over actual spending in fiscal year 2023.

The SEC noted that Medly management pitched investors on the company as a disruptor in the pharmacy industry, claiming it would provide a full online service from prescription writing to drug delivery. This business model was said to reduce the need for physical pharmacies and lower other costs.

"Investors were told that Medly, as the 'fastest-growing digital pharmacy in the nation,' was achieving rapid revenue growth and great success," the SEC said in a statement. "But in reality, most of Medly's revenue and growth were built on fake prescriptions and accounting violations."

According to the SEC, starting in 2020, the company's head of pharmacy operations allegedly created hundreds of fake prescriptions in the company's pharmacy management system, generating millions of dollars in false revenue.

The executive linked these prescriptions to Medly patients marked as "deceased" or fabricated patient profiles, knowing the company was in the middle of fundraising. The SEC also noted that the executive invented insurance companies claiming to "pay" for the fake prescriptions, including drugs priced at over $172,000 each.

The scheme began to unravel in late 2020 when an investor raised concerns with the CEO and CFO about a large and growing debit balance in the accrued expenses account under "other current liabilities."

The SEC said that in November 2020, Medly hired "multiple accounting firms to help 'clean up' its financial statements." Shortly thereafter, the CFO told one of the firms that Medly may have overstated revenue by as much as 20%.

Despite this, Medly continued to raise funds from investors, using some of it to acquire a retail pharmacy chain with 28 physical stores and over 800 employees. By the end of 2022, Medly operated 32 pharmacies or distribution centers in the U.S.

The SEC said the CEO and CFO gradually persuaded investors to purchase over $170 million in Medly stock and convertible notes. The fraud began to collapse in April 2022, and Medly filed for Chapter 7 liquidation in April 2023.

"Those who invested in Medly lost their entire investment," the SEC said.