* Watson's lawyer blames former COO Samir Rao for the fraud

* Former deputies Rao and Han testified against Watson, admitting to lying to investors

* Prosecutors argue Watson knowingly misled investors about Ozy's financial health

July 11 (Reuters) - Ozy Media co-founder Carlos Watson was betrayed by a top deputy who lied to investors and forged documents to hide the startup’s dire finances, a defense lawyer said on Thursday during closing arguments in the former news anchor’s fraud trial. Watson, a former cable news anchor and investment banker, and Ozy are charged with securities fraud and wire fraud conspiracy. Prosecutors say they falsified information about Ozy’s finances and audience size, fabricated contracts and inflated its earnings projections to dupe investors.

Watson and Ozy have pleaded not guilty. Ozy Media was a buzzy, California-based news and entertainment company founded in 2013. It imploded in 2021 after news reports questioned its audience numbers and revealed that a top executive had impersonated a YouTube executive during a bizarre call with Goldman Sachs bankers.

Watson's lawyer Ronald Sullivan told jurors on Thursday that Ozy co-founder and former Chief Operating Officer Samir Rao is to blame.

“At the beginning of this trial, I told you this case was about a crooked co-founder named Samir Rao who lied to, who undermined and who betrayed Carlos Watson. The evidence has borne that out in this case,” Sullivan said.

Rao and Suzee Han, Ozy’s former chief of staff, pleaded guilty to fraud and conspiracy charges in February 2023. Both testified against Watson during the six-week trial.

The case stems from the dramatic downfall of Ozy, which raised more than $70 million from investors and promised to deliver smart news coverage to a young, diverse audience.

Ozy folded shortly after a series of September 2021 news articles questioned claims about its audience size and revealed Rao's impersonation of the YouTube executive using a voice modulator and a bogus email address.

Watson acknowledged the incident but denied having anything to do with it, but prosecutors said contemporaneous chat logs show he coached Rao on what to say during the call with potential investors at Goldman.

Rao and Han told jurors they helped Watson lie to investors about Ozy’s financial performance because they needed cash to cover the company’s operating expenses and interest payments.

Ozy’s cash reserves had dwindled to just $19,000 in 2018 as the company struggled to pay rent, wages and other basic expenses, according to trial evidence, but prosecutors said Watson continued to tell investors the company was thriving.

“Watson knew the company was failing, but he was determined to turn Ozy and himself into the next big thing, and he wasn’t going to let the truth stand in his way,” prosecutor Gillian Kassner said during her closing argument on Wednesday.

Watson testified for several days in his own defense, saying prosecutors’ version of Ozy’s finances was overly simplistic and failed to appreciate the nuances of media industry dealmaking. He said Ozy was on track to be a successful company until it was undone by negative press coverage.

During cross-examination, Watson was at times evasive about the inconsistent revenue figures Ozy provided to investors, refusing to give yes or no answers about how much money the company made in given years.

When asked by a prosecutor to break down Ozy's annual revenue in cash rather than future potential earnings, he declined.

"That's not the way I've thought about it before and that's not the way our investors thought about it," he said.

(Reporting by Jack Queen in New York; Editing by Noeleen Walder and Matthew Lewis)