Zocdoc swings back at ousted CEO's fraud allegations

The online appointment booking service called for a dismissal and re-filing of the former CEO's lawsuit, and outlined a financial rebound since his dismissal in a new blog post.
By Dave Muoio
03:31 pm
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About a month after ousted Zocdoc CEO Cyrus Massoumi filed a lawsuit accusing the company's executives of conspiracy, the online appointment booking service has fired back with a legal motion to dismiss Massoumi's suit and a blog post that refutes his critiques of their financial performance and strategy.

Massoumi's original complaint painted the picture of a collaborative effort to mislead the former CEO about an upcoming board vote so that he could not exercise stock options and protect himself from an unexpected expulsion.

Zocdoc calls for dismissal and re-filing in light of company bylaws, NDA breach

In the new filing, attorneys of the defendants (Nikhil Ganju [cofounder and current board member], Dr. Oliver Kharraz [cofounder and current CEO] and Netta Samroengraja [former CFO and current chief business officer]) argue that the case should be dismissed and re-filed in Delaware, rather than in New York where the statute of limitations for fraud is longer.

As it stands now, the suit violates Zocdoc's bylaws that require internal affairs claims to be litigated in Delaware, the filing reads, and tries to avoid this requirement by targeting individual stakeholders rather than Zocdoc itself. In addition, the defendants' legal team alleges that the Zocdoc financials referenced in Massoumi's complaint violate the NDA he signed in order to receive the private company's information as a stockholder.

Beyond these arguments, the filing also notes that Massoumi's complaint does not make a case of fraud, as the company's bylaws "do not require advance notice of agenda items for regularly scheduled board meetings like the one in which [Massoumi] was terminated]."

Additionally, the defendants argue that Massoumi's complaint does not provide any specifics regarding the alleged misdirection, "though it would have obviously contradicted the bylaws if they had," and that Massoumi in fact did not own enough stock options in late 2015 to block the vote as he had claimed, "and thus cannot establish that Defendants’ purported fraud caused his alleged losses."

"The Complaint must be dismissed because it was required to be filed in the Delaware Court of Chancery, and does not state a claim under New York law in any event. Because Plaintiff cannot cure those flaws under any set of facts, the Complaint should be dismissed with prejudice," the defendants' filing concludes.

Of note, the dismissal filing opens by referencing Massoumi's "repeated unprofessional conduct and extremely poor business judgment," and says that he did not raise any legal objections "given the overwhelming support for his removal."

Zocdoc defends its strategy shift with a quick summary of its financials, employee retention

Massoumi named high stakes in his original complaint, as he sought to invalidate his removal as CEO and chairman of Zocdoc, receive compensation for monetary damages and invalidate actions of the Zocdoc board since December 2015. An outcome in his favor could drastically shift the company's operations going forward.

But Massoumi's complaint also brought attacks on Zocdoc's "poor management," "murky, ever-changing business strategy" and the impact those moves have had on patients and providers. While briefly refuted in the dismissal filing, the company pushed hard against Massoumi's characterization by sharing a handful of its topline private financials to the public in a blog post.

The company's controversial decision to transition its pricing model away from a flat subscription fee brought boons to its business, allowing the company to become EBITDA profitable in September 2019 and remain that way on a quarterly basis until the emergence of COVID-19, the company wrote. And in spite of the pandemic, the company is still on track for year-over-year growth and is "no longer dependent on outside capital to grow."

The company also said that it has become one of the country's largest telehealth platforms "virtually overnight" thanks to video visit capabilities launched in April, and that its 10,000 provider-strong network "is on par with or larger than that of Amwell or Teladoc."

This performance is a contrast to Zocdoc's position in 2015, where the company said that it was facing flat-lined revenue of 1% month-over-month growth. Although the company was bringing in $71 million in annual revenue and raised $130 million from investors, it'd also burned through $43 million in cash. Internally, the Zocdoc's sales team was bleeding with 144 hires against 232 departures in 2015, and had received less than glowing reports regarding its culture.

"The business was losing money and dependent on fundraising, all while growth stagnated as the result of ineffective strategy and execution," the company wrote. "Acting in response to feedback from the broader organization, the board removed Cyrus Massoumi as CEO in November 2015 at a regularly scheduled board meeting. The next day, the board appointed Oliver Kharraz as CEO, a decision that was also supported by the Executive team. These actions were taken to safeguard Zocdoc’s future and preserve shareholder value, and in full compliance with the company’s governance documents."

Zocdoc's defense concludes with a nod to its culture and self-stated mission of putting patients first. The company said that it has reduced employee attrition by about 50%, and saw in an annual anonymous employee engagement survey that 89% of employees believed the company upholds its goal to "give power to the patient." Ninety-two percent of employees said they are confident in Zocdoc's current CEO, the company wrote.

"We have faced the existential challenges of a CEO change, a business model transformation and a global pandemic," the company in its post. "We have not only survived, we have thrived. But our greatest strength is the trust that millions of patients place in Zocdoc to support their healthcare needs: from primary to specialty care, from mental health to dental health, and whether in-person or virtually."

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