June 18, 2018

Former Theranos execs indicted on fraud charges

Daily Briefing

    The Department of Justice (DOJ) on Friday announced that a federal grand jury has indicted Theranos founder Elizabeth Holmes and Ramesh "Sunny" Balwani, the company's former president and COO, on criminal fraud charges.

    Before the announcement, the company's board of directors appointed David Taylor, the company's general counsel, to replace Holmes as Theranos' CEO.

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    Background

    Theranos came to prominence for its quick, nearly painless finger-prick technology. However, the company has faced repeated scrutiny from regulators about its lab procedures and the accuracy of its tests. Ultimately, the Securities and Exchange Commission earlier this year announced that it had charged Theranos, as well as Holmes and 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."

    Details of the new charges

    DOJ said Holmes and Balwani were indicted on two counts of conspiracy to commit wire fraud and nine counts of wire fraud over their alleged involvement in Theranos' schemes to defraud doctors, investors, and patients. DOJ said the charges stem from an investigation conducted by the FBI, FDA's Office for Criminal Investigations, and the U.S. Postal Inspection Service.

    The indictment alleges Holmes and Balwani participated in a multimillion dollar scheme to defraud potential investors using direct communications, financial statements, marketing material, models, statements to the media, and other information. The indictment alleges Holmes and Balwani encouraged and convinced physicians and patients to use the company's blood testing laboratory services through such advertisements and solicitations, despite knowing that "Theranos was not capable of consistently producing accurate and reliable results for certain blood tests," DOJ said.

    In particular, the indictment claims that "Holmes and Balwani knew" the company's blood testing technology "in truth, had accuracy and reliability problems, performed a limited number of tests, was slower than some competing devices, and, in some respects, could not compete with existing, more conventional machines," DOJ said.

    Holmes and Balwani, if convicted, could face a maximum sentence of 20 years in prison and a fine of $250,000 plus restitution for those who were defrauded for each criminal charge, the Journal reports. 

    Comments

    John Bennett, special agent in charge of the FBI in San Francisco, said, "This indictment alleges a corporate conspiracy to defraud financial investors," and, "more egregiously, this conspiracy misled doctors and patients about the reliability of medical tests that endangered health and lives."

    Jeffrey Coopersmith, a lawyer representing Balwani, said, "Balwani is innocent and looks forward to clearing his name." Coopersmith continued, "All … Balwani did was put his heart and soul, and millions of dollars of his money, toward changing the face of health care by giving people access to cost-effective blood tests so they could take charge of their own health and monitor changes for signs of disease."

    A lawyer representing Holmes did not respond to a request for comment, the Journal reports (Johnson, Washington Post, 6/15; Carreyrou, Wall Street Journal, 6/15; Abelson, New York Times, 6/15; Neidig, The Hill, 6/15; Raymond, Reuters, 6/15).

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