SEC Charges Theranos Founder Elizabeth Holmes With 'Elaborate, Years-Long Fraud' | KUOW News and Information

SEC Charges Theranos Founder Elizabeth Holmes With 'Elaborate, Years-Long Fraud'

Mar 15, 2018

Elizabeth Holmes, the 34-year-old founder and CEO of the health technology company Theranos, had a compelling story of dropping out of college to launch a multibillion-dollar Silicon Valley venture to revolutionize the blood-testing industry.

But on Wednesday, the Securities and Exchange Commission accused the company, Holmes and its former President Ramesh "Sunny" Balwani of "an elaborate, years-long fraud in which they exaggerated or made false statements about the company's technology, business, and financial performance" to raise more than $700 million from investors.

Holmes and Theranos agreed to settle the charges against them, the SEC says. Holmes will give up voting control of the company, pay a $500,000 penalty, agree to not serve as a director or officer of a publicly traded company for 10 years and return "the remaining 18.9 million shares that she obtained during the fraud."

As part of the settlement, Theranos and Holmes neither admitted nor denied the allegations. The company's "independent directors" said in a statement, "The Company is pleased to be bringing this matter to a close and looks forward to advancing its technology."

Holmes founded Theranos in 2003 at the age of 19 after dropping out of Stanford University. She attracted famous investors such as Rupert Murdoch and venture capitalist Tim Draper, according to The Wall Street Journal. Henry Kissinger and George P. Schulz sat on the company's board at one point. At its height, Theranos reached a valuation of more than $9 billion.

Holmes claimed to have developed technology that could "run comprehensive laboratory tests from a tiny sample or a few drops of blood that could be taken from a finger," as she told an audience at a TED talk, NPR's Laura Sydell reported in 2016.

But the SEC alleged that "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."

Federal regulators also say Theranos falsely claimed its products were used "on the battlefield in Afghanistan" by the Department of Defense and that the company would make $100 million in revenue in 2014. The military never used Theranos technology and the actual profit was closer to $100,000, the SEC alleges.

Regulators began investigating after The Wall Street Journal's John Carreyrou reported in late 2015 about doubts over the company's technology claims and the accuracy of its tests.

Problems for the company quickly began to stack up. In 2016, Theranos cut 40 percent of its staff of 790 and closed blood-test centers in Arizona, California and Pennsylvania. In the same year, Theranos lost a lucrative contract to have its "wellness centers" in Walgreens stores, while regulators prohibited Holmes from owning or operating a lab for two years.

Many investors have lost all of the money they put into the company, the Journal reports, including Murdoch, who lost more than $100 million.

The SEC said it did not settle with Balwani; it says it will litigate a case against him in the Northern District of California. In a statement to multiple media outlets, Balwani's lawyer Jeffrey Coopersmith said Balwani "accurately represented Theranos to investors to the best of his ability."

"The Theranos story is an important lesson for Silicon Valley," Jina Choi of the SEC's San Francisco office said 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."

Federal prosecutors in San Francisco are still conducting a criminal investigation, according to the Journal, while patients have filed lawsuits consolidated in Arizona accusing Theranos of "consumer fraud and medical battery."

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