Ozy Media, CEO Carlos Watson Accused Of Fraud

Ozy Media and Chief Executive Carlos Watson have been charged with lying to investors and lenders about the size of the company’s audience and other aspects of its business, a crippling blow to a once-promising startup that had early backing from big-brand advertisers and venture capitalists.

Mr Watson was arrested at a Manhattan hotel on Thursday morning and accused of falsifying information about Ozy’s performance and inflating its projected earnings to secure tens of millions of dollars in investments to help offset the fledgling company’s mounting debt, according to one indictment Thursday. The US Attorney’s Office in Brooklyn, NY charged the company and Mr. Watson with conspiracy to commit securities fraud and wire fraud.

Mr Watson’s arrest comes after Samir Rao, a former manager with whom he founded Ozy, pleaded guilty to fraud and identity theft charges in a secret federal court hearing earlier this week. The Securities and Exchange Commission also filed a civil complaint against Messrs. Watson and Rao and Ozy alleging that they lied to investors.

Ozy came under federal scrutiny for his business practices after the New York Times reported in 2021 that Mr. Rao, its then chief operating officer, posed as an Alphabet Inc. YouTube executive during a fundraiser with Goldman Sachs Group Inc Watson acknowledged the incident in a statement at the time, but said Mr Rao’s behavior on the call was the result of a mental health issue.

In reality, prosecutors claimed, Mr Watson was aware of Mr Rao’s identity and via a series of text messages instructed him on what to say during the call. Mr Watson and Mr Rao also agreed, according to the indictment, that Mr Rao used a fake email address to pose as a cable network executive in 2020 in order to secure a loan from a bank. Both men were charged with aggravated identity theft.

“Carlos Watson is a fraudster whose business strategy rests on outright deceit and fraud,” said Brooklyn US Attorney Breon Peace.

Lanny Breuer, Mr Watson’s lawyer, said he was disappointed that his client had been arrested. “We have acted in good faith and believe we have had a constructive dialogue with the government and are shocked by the actions taken this morning,” he said.

A lawyer for Ozy said the company was in talks with the government about a possible no-charge solution.

“It’s hard to understand the actions taken today given these discussions,” said attorney Jason Weinstein.

Mr Rao pleaded guilty Tuesday, using a court-approved pseudonym of John Doe. He admitted that between 2018 and 2021 he made misleading statements to investors and inflated the company’s financial performance while also committing identity theft.

He was allowed to attend the pleading under the alias Doe to disguise his identity while the Brooklyn US Attorney’s office continues to investigate Ozy, court documents show. His case was unsealed on Thursday after Mr Watson’s arrest.

“Mr. Rao has pleaded guilty and has accepted full responsibility for his actions,” his lawyers said in a statement. “He is deeply remorseful, apologizes to those affected and is committed to making amends with Ozy Media for his actions.”

Another former Ozy officer pleaded guilty to fraud and conspiracy charges on Feb. 14. Suzee Han, the company’s former chief of staff, told a magistrate that she falsified financial information about the company at the direction of two executives. She did not identify the executives. Ms. Han was also allowed to participate in her pleading as Jane Doe. Her attorney declined to comment.

Mr. Rao and Ms. Han were both released on bail while awaiting their verdicts later this year.

Founded in 2013, Ozy, which has published youth-focused articles, podcasts and videos on current events, has been struggling to survive after facing questions about its business practices. Mr. Watson, a former Goldman Sachs banker and MSNBC host, has been featured prominently in the content produced by the startup, hosting a talk show that features interviews with celebrities such as Matthew McConaughey and Scarlett Johansson.

According to startup research firm PitchBook Data, the company had raised $83 million as of April 2020 and was valued at $159 million at the time.

Mr Rao resigned from his position at Ozy after the New York Times reported on his impersonation. Goldman Sachs and YouTube representatives did not immediately respond to requests for comment.

The article also raised questions about discrepancies between Ozy’s stated audience size and his actual audience. However, at the time Mr. Watson called the reporting flawed, Ozy was losing advertisers, royalties and talent while also coming under scrutiny from the Justice Department and the Securities and Exchange Commission.

Ozy’s board of directors announced in October 2021 that the company would cease operations, but reversed course days later. The company has struggled to regain its financial footing, at one point shrinking to six full-time employees in addition to Mr Watson, the company’s interim chief financial officer said in a court filing in October 2022.

Ozy has survived with significantly discounted advertising fees, but the company has made a modest turnaround through new production efforts and hiring, the CFO said in the filing. Earlier this month, Semafor reported that Mr Watson recently told potential advertisers and investors at a media conference that the company would be bringing back its Ozy Fest series of events, having previously discontinued it.

Write to James Fanelli at [email protected]