SEC Charges Theranos Founder and CEO Elizabeth Holmes with “Massive Fraud”

Elizabeth Holmes, founder and CEO of blood testing company Theranos has been charged with defrauding investors in the hundreds of millions of dollars |Former president and chief operating officer Ramesh Balwani is also implicated

SEC Charges Theranos Founder and CEO Elizabeth Holmes with “Massive Fraud”

The United States Securities and Exchange Commission (SEC) Wednesday charged Theranos Founder and CEO, Elizabeth Holmes, with defrauding investors to the tune of some $700 million.

Ramesh “Sunny” Balwani, former president and chief operating officer of the blood testing start-up, is a co-accused in the “massive” rip-off.

According to the SEC, Theranos, Holmes and Balwani resorted to false and fraudulent claims about the company’s products and technology in order to raise money from investors, which ran into the hundreds of millions of dollars.

In one such sham declaration, the company is reported to have claimed that the U.S. Army was one of its clients and had used Theranos products in Afghanistan.

“Theranos, Holmes, and Balwani claimed that Theranos’ products were deployed by the US Department of Defence on the battlefield in Afghanistan and on medevac helicopters and that the company would generate more than $100m in revenue in 2014,” the SEC said in its complaint.

“In truth, Theranos’ technology was never deployed by the US Department of Defence and generated a little more than $100,000 in revenue from operations in 2014,” continued the SEC charge.

The company, which was at one time valued at $9 billion, claimed that its Edison device was capable of performing tests for conditions ranging from cholesterol to cancer, with just a drop of blood from a finger-prick.

Obviously, with claims as tall and game-changing as the ones the company was making, it was a matter of time before investors started pouring big money into Theranos.

“In truth … Theranos’ proprietary analyser could complete only a small number of tests, and the company conducted the vast majority of patient tests on modified and industry-standard commercial analysers manufactured by others,” the SEC said.

“Investors are entitled to nothing less than complete truth and candour from companies and their executives,” SEC Enforcement Division co-director Steven Peikin said.

“The charges against Theranos, Holmes, and Balwani make clear that there is no exemption from the anti-fraud provisions of the federal securities laws simply because a company is non-public, development-stage, or the subject of exuberant media attention,” Peikin added.

SEC’s San Francisco regional office director Jina Choi couldn’t have phrased it better when he said, “The Theranos story is an important lesson for Silicon Valley,” going on to say that, “Innovators who seek to revolutionise and disrupt an industry must tell investors the truth about what their technology can do today – not just what they hope it might do someday.”

In 2003, Holmes – a 19-year-old Stanford University dropout – founded Theranos, seeking to develop a revolutionary blood testing device.

Holmes – whose net worth was estimated at $4.5 billion by Forbes magazine in 2015, and who was once compared to the late Steve Jobs – will have to pay a “$500,000 penalty, stay barred from serving as an officer or director of a public company for 10 years, return the remaining 18.9 million shares that she obtained during the fraud, and relinquish her voting control of Theranos by converting her super-majority Theranos Class B Common shares to Class A Common shares,” going by the SEC complaint.

“As a result of Holmes’ alleged fraudulent conduct, she is being stripped of control of the company she founded, is returning millions of shares to Theranos, and is barred from serving as an officer or director of a public company for 10 years,” SEC Enforcement Division co-director Stephanie Avakian confirmed.

“This package of remedies exemplifies our efforts to impose tailored and meaningful sanctions that directly address the unlawful behavior charged and best remedies the harm done to shareholders.”

“The company is pleased to be bringing this matter to a close and looks forward to advancing its technology,” Theranos’ independent directors said in a statement.

However, the settlement between the agency and Holmes, who has neither denied nor admitted the SEC charges, will need the necessary court approval before it can be put into effect.

How did it come to this?

Following a 2015 Wall Street Journal story entitled “Hot Startup Theranos Has Struggled With Its Blood-Test Technology,” the SEC invested a good two years getting to the bottom of the multi-million-dollar scandal.

Reporter John Carreyrou’s investigative piece had brought to light the fact that the start-up was indulging in false claims about its blood-testing technology. The company was, in fact, using traditional machines to do most of the tests which it claimed were being done using its signature device – the Edison.

Carreyrou spoke to several former employees who also expressed their concerns over the accuracy of the much-hyped Edison technology.

Then in 2016, Centers for Medicare & Medicaid Services (CMMS) investigating the Theron malpractices wrote to the company that federal officials had identified multiple issues concerning Theranos’ Newark lab in California.

The CMMS letter stated that their investigation had “determined that the deficient practices of the laboratory pose immediate jeopardy to patient health and safety,” ordering corrective measures and saying that non-compliance would attract sanctions.

In a statement responding to the allegations, company spokeswoman Brooke Buchanan wrote that Theranos had taken appropriate steps, including appointing a new lab director and clinical consultant, to address the issues highlighted by the inspection.

“We value engagement with our regulators, which helps us build best-in-class systems, and are committed to ensuring that all our labs operate at the highest standards,” she said.

The same year Theranos informed CMMS officials that it had voided two years worth of Edison test results, a source familiar with the matter told WSJ at the time.

CMMS subsequently revoked the company’s license to run the offending lab, banning Holmes from owning or operating a lab for two years.

In 2017, Holmes settled with CMMS, agreeing to the two-year ban on owning or operating a lab on the condition that the fine imposed be brought down to $30,000, and that the license revocation order is reversed.

Again, in 2017, the company had to settle a breach of contract lawsuit by Walgreens Boots Alliance.

Earlier that year, the company had claimed that it had settled with hedge fund company Partner Fund Management, concerning a lawsuit accusing Theranos of securities fraud, alleging that the company had attracted the investment through a series of “lies, material misstatements, and omissions.”

Partner Fund Management had invested a whopping $96 million in Theranos in 2014

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