SEC charges Theranos with “massive fraud,” CEO Holmes stripped of control

The once-darling Silicon Valley startup that promised to revolutionize the blood-testing industry and fetched a valuation of $9 billion may have finally been dealt a death blow.

The Securities and Exchange Commission on Wednesday charged Theranos Inc., its founder and CEO Elizabeth Holmes, and former President Ramesh “Sunny” Balwani with “massive fraud” after a lengthy investigation. The SEC alleges that they raised $700 million in investments by orchestrating an “elaborate, years-long fraud in which they exaggerated or made false statements about the company’s technology, business, and financial performance.”

Without admitting or denying wrongdoing, Theranos and Holmes have agreed to settle the charges. As part of the settlement, Holmes will pay a $500,000 penalty, be barred from serving as a director or officer of a public company for 10 years, return her remaining 18.9 million shares obtained during the alleged fraud, and relinquish her voting control of Theranos. If Theranos is sold or liquidated, Holmes will not profit until more than $750 million is returned to allegedly defrauded investors and other shareholders.

These settlement terms are subject to approval from a court. The SEC said it will litigate claims against Balwani in federal court.

In a statement on its website, Theranos announced the charges and settlement. “The Company is pleased to be bringing this matter to a close and looks forward to advancing its technology,” it said.

A long time coming

The charges are the latest devastating blow to Theranos, which has faced a staggering set of legal and regulatory challenges in recent years. Despite an auspicious start, the company’s fortunes took a turn in 2015 when an investigation by The Wall Street Journal unearthed technical problems with the company’s proprietary technology.

Theranos had claimed that its portable blood analyzer could cheaply carry out more than 200 tests on just drops of blood, skipping the need for vein draws and pricey lab work. But as investigations by the Food and Drug Administration as well as the Centers for Medicare & Medicaid Services (CMS) would find, the company’s technology was critically flawed and hit numerous regulatory problems.

By July of 2016, the CMS issued sanctions against the company that would close down one of its two labs and bar Holmes from owning, operating, or directing a clinical lab for at least two years. Theranos was forced to void years’ worth of testing results and has faced lawsuits from former customers, investors, partners (including Walgreens), and the state of Arizona, where it operated a direct-to-consumer blood-testing business.

The SEC alleges that, prior to all of that, Theranos had painted a rosy picture of its technology, despite being fully aware that it was inaccurate and incapable of performing the blood tests claimed.

According to the SEC:

Theranos, Holmes, and Balwani made numerous false and misleading statements in investor presentations, product demonstrations, and media articles by which they deceived investors into believing that its key product—a portable blood analyzer—could conduct comprehensive blood tests from finger drops of blood, revolutionizing the blood-testing industry. In truth, according to the SEC’s complaint, Theranos’ proprietary analyzer could complete only a small number of tests, and the company conducted the vast majority of patient tests on modified and industry-standard commercial analyzers manufactured by others.

The SEC notes that Theranos, Holmes, and Balwani also falsely claimed that the US Department of Defense used its technology on the battlefield in Afghanistan and in medevac helicopters. The DOD never did. And though the trio stated that the company would make more than $100 million in revenue in 2014, it made little more than $100,000.

“The Theranos story is an important lesson for Silicon Valley,” said Jina Choi, director of the SEC’s San Francisco Regional Office, in a statement.  “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.”

Despite the crippling blows, Theranos has limped on, keeping Holmes as its head and pivoting from clinical blood testing to device manufacturing. It’s been developing a device called the miniLab, which is said to miniaturize and combine old-school clinical techniques in one piece of equipment for more convenient, low-volume blood testing. The concept is not as revolutionary as the company’s previous claims, but clinical chemists who saw some preliminary data at a conference described it as “pretty impressive.”

Meanwhile, reports last year suggested that as Theranos was trying to settle lawsuits and claims, its cash flow was dwindling. The company also announced that it laid off nearly half of its workforce and was reportedly putting its headquarters up for rent.

https://arstechnica.com/?p=1275525