FILE — Carlos Watson participates in "The Contenders: 16 for 16" panel during the PBS Television Critics Association summer press tour, July 29, 2016, in Beverly Hills, Calif. Watson, founder of the troubled digital start-up Ozy Media, was arrested Thursday, Feb. 23, 2023 on fraud charges as part of a scheme to prop up the financially struggling company, which hemorrhaged millions of dollars before it shut down amid revelations of possibly deceptive business practices. (Photo by Richard Shotwell/Invision/AP, File)
NEW YORK (AP) – The founder of the troubled digital start-up Ozy Media pleaded not guilty Thursday to federal fraud charges accusing him of scheming to prop up his financially struggling company, which hemorrhaged millions of dollars before it shut down amid revelations of possibly deceptive business practices.
Federal agents arrested Carlos Watson at a Manhattan hotel earlier in the day after two of the company’s top executives pleaded guilty this month to fraud charges, including Ozy’s then-chief operating officer, Samir Rao, who prosecutors say impersonated a YouTube executive during a pitch to Goldman Sachs, a potential investor.
The indictment unsealed Thursday in U.S. District Court in Brooklyn accuses Watson of conspiring to commit securities fraud and wire fraud, as well as identity theft for his role in the impersonation of several media executives.
In a parallel civil case, the Securities and Exchange Commission also charged Watson and the company with defrauding investors of about $50 million “through repeated misrepresentations concerning the company’s basic financial condition, business relationships, and fundraising efforts.”
Ozy advertised itself as a progressive digital platform for “the New and the Next,” saying on its website that it sought to create a “space for fresh perspectives, introduces you to rising stars and breakthrough trends, and offers new takes on everything from news and culture to technology, business, learning and entertainment.”
Watson cofounded the company with Rao in California’s Silicon Valley a decade ago.
But the company imploded under insurmountable debt and questions over its fundraising tactics. As its expenses mounted, it relied on high-interest loans and began to more aggressively court investors.
Scrutiny over the company deepened after the New York Times reported in October 2021 that an Ozy official had masqueraded as a YouTube executive in a failing attempt to get Goldman Sachs to infuse money into the struggling enterprise.
Shortly after, Ozy said it was shutting down.
Watson’s attorney, Lanny Breuer, said he was “deeply disappointed by the arrest” and thought that “good faith and progressive dialogue” with the government were progressing.
“Given the government’s claims of promoting such dialogue in general,” Breuer said, “I simply do not understand the dramatic decision to arrest Carlos this morning.”
Watson was released following his arraignment after posting $1 million bond partly secured by his house. He is expected to next appear in court April 3. Company representatives are back in court March 8.
Rao pleaded guilty in federal court this week, while Han did so last week. The guilty pleas and arrests were first reported by the Wall Street Journal.
In a statement posted on its website Thursday, the SEC said Rao and Ozy’s former chief of staff, Suzee Han, “agreed to resolve the charges against them.”
Authorities say Watson and his business partners, between 2018 and 2021, attempted to defraud investors and lenders of “tens of millions of dollars through fraudulent misrepresentations and omissions” about the company’s debts and other key financial information.
“As alleged, Carlos Watson is a con man whose business strategy was based on outright deceit and fraud,” said Breon Peace, the U.S. Attorney for the Brooklyn-based Eastern District of New York. “He ran Ozy as a criminal organization rather than as a reputable media company.”
Michael J. Driscoll, the assistant director-in-charge of the FBI’s New York field office said Watson “repeatedly attempted to entice both investors and lenders through a series of deliberate deceptions and fabrications.”
On multiple occasions, the U.S. attorney’s office said, Watson and his colleagues pretended to be other media executives to cover up earlier misrepresentations.
If convicted, Watson faces at least two years in prison up to a maximum of 37 years, the U.S. attorney’s office said.
The SEC’s civil complaint, also filed in the U.S. District Court in Brooklyn, accuses Watson and the company of violating anti-fraud provisions of federal securities laws.
“We allege that over the course of several years, the defendants raised approximately $50 million from victim investors on the basis of fraudulent documents and repeated misrepresentations, including, at least in one case, falsely impersonating a potential business partner during a meeting with an investment bank,” said Gurbir S. Grewal, the SEC’s director of enforcement.
The agency, whose regulatory responsibilities include protecting investors, accused Ozy officials of “routinely and purposely” presenting potential investors with dubious financial information, including falsely claiming that the company’s revenues were at least twice what they actually were.
In addition, the SEC said, Watson and Rao also sought investments by allegedly telling prospective investors that they were securing money from high-profile companies and investors.
In one case, the SEC and federal prosecutors contend, Watson and Rao launched a ruse that had Rao impersonating a YouTube executive to convince a prospective investor that it was getting licensing revenue from the online video-sharing behemoth.
When the potential investor discovered the alleged ploy, Watson asserted that Rao was suffering from a “mental health crisis,” the SEC said.
