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March 15, 2018

Theranos and Elizabeth Holmes charged with 'massive fraud'

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    The Securities and Exchange Commission (SEC) on Wednesday announced that it has charged Theranos, as well as the company's founder and CEO Elizabeth Holmes and its former President Ramesh Balwani with deceiving investors "through an elaborate, years-long fraud in which they exaggerated or made false statements about the company's technology, business, and financial performance."

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    Theranos came to prominence for its quick, nearly painless finger-prick technology, which the company said would revolutionize health care. However, the company has faced repeated scrutiny from regulators about its propriety, lab procedures, and the accuracy of its tests.

    Details of the charges

    SEC in complaints filed Wednesday said Theranos, Holmes, and Balwani made several false and misleading statements about the company's blood analyzer in investor presentations, product demonstrations, and media articles to ultimately raise more than $700 million from investors. According to SEC, the case involved "massive fraud."

    For instance, SEC in the complaints alleged Theranos, Holmes, and Balwani claimed the blood analyzer could conduct comprehensive blood tests from just a few drops of blood, when the test actually could complete a small number of blood tests. According to the complaints, Theranos had used modified and industry-standard commercial blood analyzers manufactured by other companies to conduct comprehensive blood tests.

    In addition, SEC said Theranos, Holmes, and Balwani claimed the company would generate $100 million in revenue in 2014 in part because its blood analyzer was being used by the Department of Defense (DOD) in Afghanistan battlefields and medevac helicopters. However, DOD never deployed the analyzer, and the company generated slightly more than $100,000 in revenue in 2014.

    Further, according to the complaints, Holmes "in late 2013 through 2015" told investors the company did not need FDA's approval to sell the portable blood analyzer, but FDA in 2013 and 2014 told Theranos and Holmes the company did need the agency's approval to sell the portable analyzers.

    Theranos, Holmes settle charges

    According to SEC, Theranos and Holmes have agreed to settle the fraud charges. Holmes under the settlement has agreed to:

    • Convert her super-majority Theranos Class B Common shares to Class A Common shares, which would relinquish her voting control of the company;
    • Not serve as an executive or director of a public company for 10 years;
    • Pay a $500,000 monetary penalty; and
    • Return the 18.9 million shares of the company she obtained during the fraud.

    Under the agreement, Holmes cannot profit from any acquisitions or liquidations of Theranos until she returns more than $750 million to investors and other preferred shareholders. According to SEC, Holmes and Theranos under the settlement agreement did not admit or deny responsibility for any of the allegations in SEC's complaint. The settlement agreement is subject to court approval.

    According to SEC, Balwani did not agree to settle the charges, and SEC will litigate the complaint against him in the U.S. District Court for the Northern District of California.


    Jina Choi, director of SEC's San Francisco regional office, in a statement said, "The Theranos story is an important lesson for Silicon Valley," adding, "Innovators who seek to revolutionize 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."

    Steven Peikin, co-director of enforcement at SEC, did not comment when asked whether SEC's complaints against Theranos and the executives, which were civil charges, would preclude future criminal charges, Reuters reports. Peikin also did not respond to a question regarding whether other federal agencies are involved in ongoing criminal investigations against the Theranos, according to Reuters.

    Theranos' independent board of directors in a statement said, "The company is pleased to be bringing this matter to a close and looks forward to advancing its technology."

    A lawyer representing Holmes declined to comment on the settlement, the Washington Post's "Wonkblog" reports.

    Jeffrey Coopersmith, a lawyer at Davis Wright Tremaine who is representing Balwani, said Balwani "accurately represented Theranos to investors to the best of his ability" (Doubek, "The Two-Way," NPR, 3/15; Schroeder, Reuters, 3/14; AP/Modern Healthcare, 3/14; Johnson, "Wonkblog," Washington Post, 3/14; SEC release, 3/14; Belluz, Vox, 3/14; SEC complaint, 3/14).

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