Years after it was reported that the SEC was looking into improprieties at the once high-flying blood-testing company Theranos, its founder, Elizabeth Holmes, and the company’s former president, Ramesh “Sunny” Balwani,” have been formally charged with massive fraud by the agency.
The charge, more precisely: that the two raised more than $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.”
Theranos and Holmes have agreed to resolve the charges against them, says the SEC, though neither admitted nor denied the allegations in the SEC’s complaint.
For her part, Holmes has agreed to: pay a $500,000 penalty; be 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. This way, if Theranos is acquired or is otherwise liquidated, Holmes won’t profit until more than $750 million is first returned to Theranos’s shareholders.
As for Balwani, the SEC says it will litigate its claims against him in federal district court.
Theranos first came under scrutiny in October 2015, when the two-time Pulitzer-prize winning WSJ journalist John Carreyrou published an explosive investigative piece, suggesting that the company — then valued by investors at a stunning $9 billion — had greatly exaggerated its abilities to quickly process an expansive range of laboratory tests from a few drops of blood.
In reality, former employees told Carreyrou, the lab instrument Theranos had developed handled just a small fraction of the tests sold to consumers, with the rest being done with traditional machines from companies like Siemens. (Famed attorney David Boies, who represented Theranos at the time, acknowledged to the WSJ that Theranos wasn’t using its device for all the tests it offered, calling the transition a “journey.”)
Employees were also “leery” about the accuracy of Theranos about the machine’s accuracy,” said the report.
They were right to be, as it turns out. According to one former employee — Tyler Schultz, grandson of former Secretary of State (and one-time Theranos board member) George Schultz — not only did Therano’s Edison machines often fail Theranos’s quality-control standards but Balwani, then president, pressured employees to run blood tests on the machines anyway.
Schultz did something about it, contacting New York state’s public-health lab to tell them Theranos had manipulated a process known as proficiency testing. It came out a cost, Schultz, later told the WSJ. Not only was he followed by private investigators but reporting the company strained relations with his grandfather.
Still, his findings were later corroborated by the federal Centers for Medicare and Medicaid Services and by last year, the Centers for Medicare and Medicaid Services had banned Holmes from owning or running a lab company for two years. Theranos also closed its last remaining blood-testing facility after it reportedly failed a regulatory inspection.
The SEC complaint seems to follows this string of events, alleging that 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.”
Theranos’s press account wasn’t receiving inbound inquiries this morning. But the company — which has been marketing a “miniLab” device that it claims can carry out an array of tests with a prick of blood and which managed to secure a $100 million loan last December from Fortress Investment Group (owned by SoftBank) — published a statement a bit ago.
Says the statement, which is somewhat remarkable for its blandness: Theranos “is pleased to be bringing this matter to a close and looks forward to advancing its technology.”
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