‘Massive fraud’: disgraced Silicon Valley superstar Elizabeth Holmes loses control of blood-test firm Theranos in deal with SEC

Theranos was once valued at US$9 billion, but US regulators say founder Holmes misled investors and the media about its key product

PUBLISHED : Thursday, 15 March, 2018, 3:32am
UPDATED : Thursday, 15 March, 2018, 9:09pm

Embattled blood-testing company Theranos Inc and its Chief Executive Elizabeth Holmes agreed to settle “massive fraud” charges in a deal that strips her of majority control among other penalties, US regulators said on Wednesday.

Theranos was once hailed as a Silicon Valley star, with a US$9 billion valuation based on its promise to disrupt the staid laboratory testing business with new technology the company claimed could analyse a single drop of blood. Founded in 2003, its fortunes began to wane in 2015 after a Wall Street Journal reports suggested its devices were flawed and inaccurate.

As part of the settlement, the Securities and Exchange Commission said company founder Holmes must also return millions of shares to the privately held company, pay a US$500,000 fine and cannot serve as an officer or director of a public company for 10 years.

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The SEC’s complaint alleged that the company, Holmes and Theranos’ former president, Ramesh “Sunny” Balwani, “made numerous false and misleading statements in investor presentations, product demonstrations, and media articles” about its key product.

Balwani did not agree to a settlement, the agency said.

[Holmes and Balwani] made numerous false and misleading statements in investor presentations, product demonstrations, and media articles
US SEC complaint

Holmes, 34, founded Theranos in Palo Alto, California, in 2003, pitching the company’s technology as a cheaper way to run dozens of blood tests. Once considered the nation’s youngest female billionaire, Holmes said she was inspired to start the company in response to her fear of needles.

Theranos raised millions in start-up funding by promoting its tests as costing a “fraction” of what other labs charge.

At the centre of Theranos’ mystique was its “Edison” machine, which the company claimed could test for a variety of diseases through only a few drops of blood from a person’s finger. Despite the hype and company claims, Theranos shared few details on how its Edison machine – named after the inventor – worked.

Theranos attracted extraordinary interest and loaded its board with huge names, mainly elder Washington statesmen, including two former US secretaries of state: Henry Kissinger and George Schultz. The group was criticised for lacking expertise in science or medicine.

Theranos raised more than US$750 million from investors including well-known venture capital firm DFJ, Walgreens, media mogul Rupert Murdoch and Oracle co-founder Larry Ellison. Many investors have already sold their stakes.

The SEC, describing the case as involving “massive fraud,” said Theranos, Holmes and Balwani were charged “with raising more than US$700 million from investors through an elaborate, years-long fraud in which they exaggerated or made false statements about the company’s technology, business and financial performance.”

The SEC’s co-director of enforcement, Steven Peikin, said on a conference call with reporters that the move to remove control of the company from Holmes was very rare for the agency.

“It’s a pretty unique set of remedies,” he said. “And I think it’s a particularly meaningful one … particularly in Silicon Valley where the founders of start-up companies like this obviously value the concept of control.”

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Peikin said the SEC intends to pursue litigation against Balwani. The regulator pursued charges against Holmes and Balwani to deter executive wrongdoing elsewhere and out of concern that imposing stiff penalties on the company itself could make it even more difficult for defrauded investors to recoup any funds.

“Really this company was a company that was a two-person operation, where Holmes and Balwani exclusively controlled Theranos. They were responsible for all of the misconduct alleged in this complaint,” he said.

Peikin did not comment on whether the civil charges preclude future criminal charges or whether other agencies were engaged in ongoing criminal investigations against the company.

Jina Choi, the head of SEC’s San Francisco Regional Office, said the company’s troubles offered “an important lesson for Silicon Valley.”

“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,” she said in a statement.

Theranos and Holmes for months refused to acknowledge that its machines were effectively a sham. State and federal authorities started investigations into the accuracy of the company’s blood testing work.

In 2016, the Centres for Medicare and Medicaid Services, which oversees blood testing labs in the US, banned Holmes from operating a lab and revoked Theranos’ blood testing license.

In late 2016, Theranos began shutting down its clinical labs and wellness centres and laid off more than 40 per cent of its full-time employees.

Along with the fine announced Wednesday, Holmes has agreed to return 18.9 million shares of Theranos that she obtained during the fraud. If the company is sold or liquidated, Holmes will not profit from any remaining ownership in the company until at least US$750 million in proceeds are returned to investors, the SEC said.

Theranos said Wednesday that neither the company nor Holmes admitted or denied wrongdoing.

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