Carlos Watson, the founder of the troubled digital start-up Ozy Media, was arrested Thursday on federal fraud charges as part of what prosecutors say was a scheme to prop up the financially struggling company.
Federal agents arrested Watson at a Manhattan hotel 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 allegedly impersonated a YouTube executive during a pitch to Goldman Sachs, a potential investor.
Ozy, which was founded in 2013, had touted “being ahead of the curve” and “never [telling] a story that another national or international publication has already covered.” But the company hemorrhaged millions of dollars before it shut down amid revelations of possibly deceptive business practices.
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.
Ozy advertised itself as a progressive digital platform, but it imploded under insurmountable debt, forcing it to rely on high-interest loans and to more aggressively court investors. It had also faced scrutiny about the size of its audience, with Watson claiming in 2021 that it had 25 million subscribers to its newsletters — more than the New York Times.
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.”
For instance, Watson and others “routinely and purposely presented prospective investors with false financial information that grossly inflated Ozy Media’s annual revenue by at least 100%,” the SEC said.
Guilty pleas
The SEC said Rao and Ozy’s former chief of staff, Suzee Han, have “agreed to resolve the charges against them,” as they did separately with U.S. prosecutors.
Rao pleaded guilty in federal court this week, while Han did so last week. The guilty pleas and arrest were first reported by the Wall Street Journal.
“I am deeply disappointed by the events of today,” Watson’s attorney, Lanny Breuer, said after the arrest. “We were engaged, I thought, in a good faith and constructive dialogue with the government. And given the government’s claims of promoting such dialogue in general, I simply do not understand the dramatic decision to arrest Carlos this morning.”
Impersonating a bank executive
Scrutiny of the company deepened after the New York Times reported in October 2021 that an Ozy official had masqueraded as a YouTube executive in a failed attempt to get Goldman Sachs to infuse money into the struggling enterprise.
Shortly after, Ozy said it was shutting down.
“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.”
Maximum sentence
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.
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, with 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 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 Ozy 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.
