Carlos Watson, the founder of the troubled digital start-up Ozy Media, was arrested on Thursday and charged with fraud, punctuating one of the more precipitous falls in the annals of online journalism.
Mr. Watson, 53, “engaged in a scheme to defraud Ozy’s potential investors, potential acquirers, lenders and potential lenders” by misrepresenting the company’s audience numbers and financial results, prosecutors for the Eastern District of New York said in a court document dated Wednesday.
He was arrested by the F.B.I. at a hotel in Midtown Manhattan early Thursday morning and will be arraigned in federal court in Brooklyn on Thursday afternoon. Prosecutors asked a judge to take steps to make sure Mr. Watson did not flee or retaliate against witnesses, saying that he “attempted to stymie the investigation” by withholding key documents and cutting off legal defense funding for witnesses perceived to be cooperating with the investigation.
Mr. Watson’s arrest came the same week as Samir Rao, 36, Ozy’s former chief operating officer, and Suzee Han, 29, Ozy’s former chief of staff, pleaded guilty to fraud charges, according to court documents.
Shortly after the arrest and guilty plea, the Securities and Exchange Commission charged Ozy Media, Mr. Watson, Mr. Rao and Ms. Han with defrauding investors of about $50 million. Mr. Rao and Ms. Han have settled the S.E.C. civil case against them.
Ozy and Mr. Watson have been under heavy scrutiny since September 2021, when The New York Times reported that someone at the start-up had apparently impersonated a YouTube executive during a conference call with Goldman Sachs, which was considering an investment. On the call, the impersonator said that YouTube had a great working relationship with Ozy and that Ozy’s videos were successful on the platform.
Within days of the report, Ozy said that it was shutting down. Federal prosecutors, the Justice Department and the Securities and Exchange Commission opened investigations into the company.
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On Thursday, Breon Peace, the U.S. attorney for the Eastern District, said in a statement that Mr. Watson was a “con man” who “ran Ozy as a criminal organization rather than as a reputable media company.”
Lanny A. Breuer, Mr. Watson’s lawyer, said he was “deeply disappointed with the events of today,” referring to his client’s arrest. Mr. Breuer added that “we had been attempting to have an open and good faith dialogue with the government, and I just don’t understand why the decision was made to arrest Carlos this morning given what we thought was our constructive dialogue.”
Jason Weinstein and Ryan Poscablo, lawyers for Ozy Media and Mr. Watson, said that they were “extremely disappointed” by the actions taken by the government and had been engaging with them “since December, and as recently as yesterday.”
Mr. Rao did not respond to requests for comment. Ed Swanson and Miles Ehrlich, lawyers who represent Mr. Rao, said in a statement that he had “accepted full responsibility for his actions,” adding, “He is deeply remorseful, apologetic to those affected, and committed to making amends for his actions while at Ozy Media.”
Ozy Media was launched in 2013 and backed financially by the German publishing giant Axel Springer, the Ford Foundation and the Emerson Collective, the organization founded by Laurene Powell Jobs, among others. It produced a website, videos posted to YouTube and podcasts that were aimed at young audiences. The company generated a mix of stories and videos that identified up-and-coming leaders and important social causes.
Prosecutors on Thursday painted a picture of a company that had struggled for years. In 2015, after raising $35 million from investors over three funding rounds, Ozy’s digital advertising business “was not succeeding,” according to the complaint the prosecutors filed. That spurred the company to start a live-events business called “Ozy Fest” and create television content.
But the live events and television businesses were expensive. By 2017, the company’s cash was beginning to run out. Beginning in 2018, it took on high-interest loans to survive, at times paying tens of thousands of dollars a day in interest. Ozy soon took on more debt and pursued more money from investors, the complaint said.
To secure more funding, Ozy misled investors about the company’s financial performance, according to the complaint. In December 2018, Mr. Watson received updates that the company’s final revenue for the year would be less than $11 million, the complaint said. But Mr. Watson and Mr. Rao told investors that Ozy had generated roughly double that amount in revenue that year, prosecutors said.
At the end of 2019, to help cover expenses and grow, Ozy sent a fake contract with a TV company to a bank to help secure a loan over the protests of the company’s former chief financial officer, according to the complaint. When the former chief financial officer became aware of the fraud, she quit in protest. She was not identified by name in the complaint.
“This … is illegal,” the former chief financial officer wrote in an email to Mr. Watson, according to the complaint. “This is fraud. This is forging someone’s signature with the intent of getting an advance from a publicly traded bank.”
At one point, Ozy also discussed selling itself to a media company for up to $225 million in stock based on false financial data and a misleading description of its TV contracts, according to the complaint. As part of that deal, which fell through, Mr. Watson pushed for a $35 million cash payment for himself, Mr. Rao and others, the complaint said.
The S.E.C.’s complaint, filed in the U.S. District Court for the Eastern District of New York, seeks fines for the defendants. Mr. Rao has agreed to not serve as an officer or director of a publicly traded company for 10 years, the agency said. The S.E.C. is seeking a similar ban against Mr. Watson.
If Mr. Watson is convicted of the fraud charges, he faces a mandatory minimum sentence of two years in prison, with a maximum of 37 years.
Although Ozy announced it would shut down shortly after The Times report was published in 2021, Mr. Watson reversed course days later, telling NBC in an interview that he would restart the company.
In recent months, Mr. Watson intensified his comeback efforts. Ozy started publishing email newsletters again and advertised on its website the 2023 return of Ozy Fest, a music and ideas festival. Readers were asked to put their email addresses on the waiting list for the event, which was to be held in Miami.
Mr. Watson also made an appearance to promote recipients of an Ozy scholarship during a presentation for advertisers in February. He plugged Ozy Fest during his appearance, according to people with knowledge of the presentation, and took the stage as speakers blared the drug-peddling anthem “Hustlin’.”
